UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-K





[X]
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the fiscal year ended September 27,
  2008.





[   ]
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the transition period from ______________ to
      _______________.





Commission File Number 0-13143





Innovex, Inc.


(Exact name of registrant as specified in its charter)





Minnesota
                41-1223933(State
      or other jurisdiction of incorporation or organization)
                (IRS
      Employer Identification
No.)






3033 Campus Drive, Plymouth, MN  55441


(Address
of principal executive offices)





(763) 383-4000


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:  None
 
 Securities
registered pursuant to Section 12(g) of the Act:  Common Stock ($.04
par value)
 (Title of
Class)
 Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act:
 Yes  [   ]                           No  [
x ]
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act:
 Yes  [   ]                           No  [
x ]


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  [X] Yes [  ] No





Indicate
by check mark if disclosure of delinquent filers pursuant to Rule 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.  See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act:


Large Accelerated
      Filer [   ]
              Accelerated
      Filer  [   ]
              Non-Accelerated
      Filer  [ ]
              Smaller Reporting
      Company  [X]


Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2): Yes [  ]  No [X]





The
aggregate market value of shares held by non-affiliates is $5,186,261 computed
by reference to the last sale price of the Company’s Common Stock, as reported
in the Nasdaq National Market system, of $0.27 per share on March 28, 2008, the
last business day of the Company’s most recently completed second fiscal
quarter. As of November 14, 2008, the Company had outstanding 19,443,153 shares
of Common Stock.





DOCUMENTS
INCORPORATED BY REFERENCE:


Portions
of the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held February 4, 2009, are
incorporated by reference into Part III.


1




Index




PART IItem 1.
                        Business
                        3Item 1A.
                        Risk Factors
                        9Item 1B.
                        Unresolved Staff Comments
                        17Item 2.
                        Properties
                        17Item 3.
                        Legal Proceedings
                        17Item 4.
                        Submission of Matters to a Vote of Security
      Holders
                        17Item 4A.
                        Executive Officers of Registrant
                        18PART IIItem 5.
                        Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                        19Item 6.
                        Selected Consolidated Financial Data
                        21Item 7.
                        Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                        22Item 7A.
                        Quantitative and Qualitative Disclosures about Market
      Risk
                        32Item 8.
                        Financial Statements and Supplementary
    Data
                        33Item 9.
                        Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                        53Item 9A.
                        Controls and Procedures
                        53Item 9B.
                        Other Information
                        53PART IIIItem 10.
                        Directors, Executive Officers and Corporate
      Governance
                        54Item 11.
                        Executive Compensation
                        54Item 12.
                        Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                        54Item 13.
                        Certain Relationships and Related Transactions and Director
      Independence
                        54Item 14.
                        Principal Accountant Fees and Services
                        54PART IVItem 15.
                        Exhibits and Financial Statement
    Schedules
                        55SIGNATURES
                        58





2




PARTI




Item 1.  BUSINESS




We
maintain a website at www.innovexinc.com
..  Our annual reports on Form 10-K, our quarterly reports on Form 10-Q
and our current reports on Form 8-K (and any amendments to these reports) are
available free of charge on our website as soon as reasonably practical after we
file these reports with the SEC.




Our
Company




We
are a worldwide provider of flexible circuit interconnect solutions to original
equipment manufacturers ("OEMs") in the electronics industry. We offer a full
range of customized flexible circuit applications and services from initial
design, development and prototype to fabrication, assembly and test on a global
basis. We target high volume markets where miniaturization, form and weight are
driving factors and flexible circuits are an enabling technology. Applications
for flexible circuits currently addressed by us include data storage devices
such as hard disk drives ("HDDs"), flat panel displays (“FPD”) including liquid
crystal displays ("LCDs") for mobile communication devices, tape drives and
printers. Our customers include Entorian, Hitachi, HP, TPO, Quantum, SAE
Magnetics (a subsidiary of TDK), Samsung, Seagate, StorageTek, Western Digital
and other leading electronic OEMs.




Our
Industry and Market Trends




Flexible
circuit interconnects provide electrical connection between components in
electronic systems and are increasingly used as a platform to support the
attachment of electronic components. Flexible circuits consist of copper
conductive patterns on flexible substrate materials, such as polyimide. Flexible
circuit interconnects frequently incorporate components, such as integrated
circuits ("ICs"), connectors, stiffeners, resistors and capacitors mounted
directly on a flexible circuit. Generally, flexible circuits offer several
advantages over other technologies such as rigid printed circuit boards ("PCBs")
and ceramic hybrid circuits, particularly for small, complex electronic systems.
Flexible circuits, due to their mechanical flexure and three-dimensional shape,
accommodate packaging contours and motion in a manner that traditional
two-dimensional, rigid PCBs cannot, particularly in applications involving
smaller, more portable and complex electronic devices where space available to
designers is at a premium.




We
believe that the overall market for high density flexible circuits will continue
to grow over the next several years as a result of favorable technological and
market trends that are expected to drive increased adoption. These trends
include the following:




Miniaturization, Portability and
Complexity of Electronic Products.    Electronics
OEMs continue to design and introduce more compact and portable
high-performance products with greater functionality. The complexity of these
new products requires smaller size, lighter weight, greater circuit and
component density, better thermal dissipation properties, higher frequencies and
increased reliability as compared to conventional rigid board assemblies. These
requirements often necessitate the use of high density flexible circuit
interconnects.




Outsourcing.    OEMs are
increasingly focusing on their core competencies and outsourcing their captive
component and subsystem manufacturing. To meet their rapidly changing electronic
interconnect requirements, many OEMs have moved to
limit their vendor base to a smaller number of technically qualified,
strategically located suppliers capable of providing both quick-turn prototype
and pre-production quantities as well as cost-competitive volume production
quantities. This allows OEMs to reduce time to market, avoid delays in new
product introductions, reduce manufacturing costs and avoid logistical
complexities.




Increased Usage of HDD in Consumer
and Non-traditional Applications.    The emerging
consumer electronics segment that includes devices such as gaming consoles, TV
set top recorders and digital music and video players such as the iPodTM, is a
significant driver of growth for HDDs.




High
density flexible circuits are increasingly being used in high unit volume
consumer electronic products such as mobile communications devices, flat panel
displays, digital televisions and inkjet printers. This trend is driven by the
end market, which demands consumer products with additional functionality,
availability in lighter weight smaller packages, better performance and lower
cost than previous generations of systems. To meet this demand, OEMs will
need to continually evaluate more complex interconnect solutions that allow them
to continue to enhance their product offerings in a cost-effective
manner.




3




Competitive
Strengths




We
believe our competitive strength is the direct result of our technological
innovation and our ability to provide comprehensive solutions that address our
customers' specific interconnect needs. Our key competitive strengths
include:




Cost
Leadership.   We believe we are one of the lowest cost
providers of high density flexible circuits in the world.  Our low
cost structure is driven by low cost Thailand labor and our automated
roll-to-roll manufacturing processes.




Technology
Leadership.    Although there are a large number of
flexible circuit manufacturers, only a few compete with us in high-end, sub-100
micron applications. We believe that technology, design
capability, quality and price are key competitive factors in this segment. Our
manufacturing technology includes proprietary processes and chemical recipes
which, when combined with our design expertise and experience, enable us to
deliver high unit volumes of complex high density flexible circuits at
cost-effective prices.




Comprehensive Product
Portfolio.    Our products address a range of
applications that include the following: (i) actuator flex (“AFC”), which
provides the back-end electrical interconnect for hard disk drives;
(ii) flat panel display (“FPD”) which provides the electrical interconnect
to LCDs for mobile communication devices; (iii ) flex suspension assemblies
(“FSA”), which provides the electrical interconnect from the disk drive head to
the back-end electronics of the disk drive;  and (iv) a variety of
high-end, high density flexible circuits for markets such as printers,
semiconductor packaging and mobile phone camera modules.




Product
Innovation.    We are recognized as a technology
innovator with a history of developing products that provide better performance
at a lower cost than our competitors. The technical expertise we have developed
in serving the highly demanding HDD industry has enabled us to introduce
advanced products in other rapidly growing markets.




Leading Customer
Relationships.    We have developed strong
relationships with Hitachi, TPO, Seagate, Western Digital and other industry
leaders. Our customer relationships represent significant entry barriers as we
believe that once a customer has selected us to design and manufacture a
flexible circuit interconnect, the customer generally relies on our design for
the life of that specific application and, frequently, subsequent generations of
similar applications.




Global Manufacturing and Supply
Chain Efficiency.    Over the past three years we
have expanded our Asian facilities to perform all of our manufacturing
processes. Our expanded Asian based manufacturing structure has allowed us to
shorten our supply chain, improve yields as a result of more immediate
processing feedback and utilize a low cost labor base.  These benefits
result in a reduction of the overall costs of our products.




Quick
Turn Prototypes.  Our expanded Asian based manufacturing
structure has also allowed us to provide our customers quick turn prototypes
which are critical to winning new customers and product
qualifications.




Our
Strategy




To
enhance our position as a leading, low cost provider of flexible interconnect
solutions we intend to pursue the following business strategies:




Cost
Leadership.    Our overriding strategic goal is to be
the lowest cost provider of high density flexible circuits in the
world.  Every decision we make is reviewed for its impact on our cost
structure.  We believe that to be successful in the hyper-competitive
flexible circuit industry and insure long-term profitability we must have the
lowest cost structure.




Increase Manufacturing and Supply
Chain Efficiencies and Flexibility.    We intend to
continue our manufacturing improvement and cost reduction efforts. Through
continued deployment of our Six Sigma quality management program, we intend to
significantly improve our efficiency, reduce our manufacturing and operating
expenses and enhance the quality of the products we manufacture by decreasing
manufacturing defects and improving product reliability.  We expect to
realize cost efficiencies by applying more automation at all of our
manufacturing facilities. We have relocated our U.S. manufacturing operations to
Thailand to improve our cycle time performance, facilitate problem solving
communications and reduce our fixed cost structure.  In addition, by
further integrating our operations with our suppliers and customers, we believe
that we can continue to reduce our working capital needs and improve our
responsiveness to customer requirements.




4




Continue to Expand Our Market Share
in Our Core Markets.    We believe that we will be
able to continue to capture additional market share from leading OEMs in
the HDD market with our AFC solution. We began volume production with an
additional HDD industry leader during fiscal 2008 and we expect to continue to
increase market share at our HDD customers as a result of our low product
pricing and high level of product quality.  We began production on a
number of FPD programs during fiscal 2008 and fiscal 2008 FPD revenue was three
times higher than it was in fiscal 2007.  We continue to have a high
level of FPD quoting and prototyping activity with our main FPD customer and
other new customers which should lead to improved FPD market share.




Continue to Penetrate New
Markets.    We have proven our ability to leverage
our expertise in high volume, high density applications to address emerging
growth opportunities. We believe the technology, research and development and
manufacturing capabilities we have developed to serve our core markets have put
us in a position to target additional high volume applications.  Our
expanded Asian based manufacturing structure has also allowed us to provide our
customers quick turn prototypes which are critical to winning new customers and
product qualifications.




Current
Product Applications




We
offer our products to a broad range of markets including the hard disk drive,
display, semiconductor packaging and consumer electronics markets. We believe
our products are differentiated by their advanced process technology, innovative
design, low cost and the functional benefits they provide to our
customers.




Current
markets addressed by our products include:




Data
Storage.    The disk drive market uses our AFC and
FSA products.  Our AFC flex product provides the back-end electronic
interconnect for hard disk drives. We are a leading provider of flip chip
interconnect solutions for these applications. Flip chip technology, in which an
unpackaged die is mounted directly onto the flexible circuit substrate, is the
predominant interconnect technology for these applications.  Our FSA
product, which reached its end of life in the second quarter of fiscal 2008,
provided the electrical interconnect from the disk drive head to the back-end
electronics (actuator flex) of the disk drive. The FSA is a flexible circuit
that is bonded to a suspension.




Our other
products for the data storage market include interconnects used for tape drives,
disk arrays and other interconnects used in hard disk drives.  We will
continue to provide flexible circuit interconnect solutions to the tape storage
industry to address customers' continuing data backup and archiving
needs.




Flat Panel
Display.    We supply flexible circuits to the
telecommunications market that provide interfaces between liquid crystal
displays and mobile communication devices.  We are also pursuing other
flat panel display applications which provide efficient, cost-effective means of
connecting flat panel displays to the electronic devises they
support.




Other
Markets.    We continue to apply our technology and
products to new markets. We produce advanced flexible circuits for high-end
consumer electronics markets and other markets that could benefit from the
technological advantages of our flexible interconnect solutions. Based on our
assessment of industry trends and market indicators, we believe these markets
will grow rapidly in the future. We are currently offering or developing new
product offerings for the following applications: non-display mobile
communication device interconnects, high-end memory module interconnects, inkjet
printer cartridges, mobile phone camera modules, battery packs, smart cards,
hearing aides and other medical products.




Technology




We
are recognized as a technology leader in fine-line, single and double-sided
flexible circuit technology and flexible circuit assembly technology, including
advanced chip-on-flex, flip chip-on-flex and precision placement assembly
technologies. Our process technology includes proprietary processes and chemical
recipes, which coupled with our design expertise and experience, enables us to
deliver high unit volumes of complex high density flexible circuits at
cost-effective yields.




Design
Technology.    The flexible circuit interconnects we
manufacture are designed specifically for each application, requiring
significant joint design activities with the customer at the start of a project.
We have developed design methodologies that solve difficult interconnection
problems and save our customers time and money. We also design and produce, in
volume, flexible circuits that range from high density, single-sided circuits to
more complex double-sided and multi-layer circuits. We are continually investing
in and improving our computer-based design tools to more quickly design new
flexible circuit interconnects, to enhance cooperative design and communication
with our customers and to more closely link designs to our manufacturing
process.




5




Circuit Fabrication
Technology.    We have extensive experience producing
fine-line polyimide flexible circuits and have pioneered manufacturing processes
that deliver high unit volumes at cost-effective yields. At the core of the
process is roll-to-roll fine-line circuit processing. The starting materials are
flexible laminates composed of a thin dielectric film that is either
adhesive-bonded to treated copper foil or metalized without the use of
adhesives. Very accurate images (down to 0.001 inches) are produced in volume in
photoresist. Circuit conductors are then formed by chemically etching the
underlying copper. Coverfilm and covercoat materials are adhered to the
circuitry to provide an insulative coating and to expose contact pads for
surface metalization. The exposed copper surfaces are then coated with solder,
gold or another surface finish for assembly or bonding applications. Laser
processing is used to create various openings such as vias and to cut contoured
peripheries in substrate materials.




Our
key flexible circuit fabrication technologies include:




Fine Feature
Wide-Width Roll-to-Roll Processing.    Our
process allows us to fabricate circuits with very fine line widths and spaces at
higher density of parts per square foot which increases material and equipment
utilization. Processing 250mm to 500mm wide web (as opposed to thenarrower industry standard) in a continuous roll-to-roll
format (as opposed to discrete panels) allows us to fabricate higher volumes at
lower cost.




Process
Technologies.    We
utilize the following process technologies in our circuit fabrication
process:




Thin-Film Sputtering Technology.In addition to our ability to convert purchased raw materials into
fine-line flexible circuits, Innovex also has the ability to sputter copper
& tie-layer metals directly onto polyimide substrates.  This enables us
to fabricate the base material, as part of our circuit fabrication process,
lowering material costs and providing greater flexibility in delivering super
fine-line products.




Semi-additive
Metallization.    Allows the fabrication of flexible
circuits with finer lines and spaces through the selective metallization of the
conductors in the circuit fabrication process.




Laser
Processing.    Produces very fine via openings and
contoured shapes that solve density problems while avoiding more expensive
traditional alternatives. Also, using a laser to cut the periphery of parts
allows prototypes and low volume production parts to be built faster and without
the cost of a blanking die.




Bondable Gold
Plating.    Prepares flexible circuit conductors and
pads for various bonding processes including chip-on-flex, which saves space and
improves electrical performance by wire bonding a semiconductor die directly to
the flexible circuit.




Coverfilm and Covercoat
Application.    Adheres coverfilm and covercoat
materials to the circuitry to provide an insulative coating and to expose
contact pads for surface metallization. This process allows accurate positioning
of solder plated pads to support fine pitch surface mount assembly to the
finished circuits.




Assembly and Test
Technology.    We differentiate ourselves from our
competitors by offering both assembly and test technology to provide complete
flexible circuit interconnect assemblies to our customers. We assemble passive
electrical and various mechanical components, including connectors, stiffeners,
diodes, formed metal parts and other devices to flexible circuits in our plants
in Thailand. We also perform advanced direct die attach and assembly of
integrated circuit devices as well as the functional testing of these flexible
circuit assemblies. Assembling these components directly onto the flexible
circuit increases performance and reduces space, weight and cost.




Research
and Development




We
continually engage in research, development and engineering activities. Our goal
is to utilize these activities to improve and enhance existing products and
processes and to develop new products and processes in order to expand our
market share. Our research and development effort is concentrated on improving
and increasing long run flexible circuit manufacturing capabilities for both
adhesiveless and adhesive based flexible circuits, developing processes for
manufacturing new products including flexible circuits for disk drive, display,
integrated circuit substrate and printer applications.




6




Manufacturing




We
have developed a manufacturing system that combines the use of technology with
the deployment of human resources that we believe allows us to provide low-cost,
high technology flexible circuits. Quality systems in place are certified to
standards set by demanding customers in the electronics industry. All operations
have received ISO 9002 certification.




We
believe our manufacturing processes, in particular our 250mm and 500mm wide web
roll processing lines, are designed to optimize the utilization of automation,
labor and capital, and deliver better yield, material utilization and throughput
relative to our competitors.




Suppliers




We
purchase raw circuit materials, process chemicals and various components from
multiple outside sources. For components, we typically make short-term
purchasing commitments to key suppliers for specific customer programs. These
commitments are usually made for three to twelve month periods. These suppliers
commit to providing cooperative engineering as required and in some cases
maintain a local inventory to provide shorter lead times and reduced inventory
levels for us. In most cases, suppliers are approved and are often dictated by
our customers. For process chemicals, we rely on a limited number of key
suppliers. We currently can obtain certain types of photoresist, a liquid
compound used in the photoetching process, certain polyimide materials and
certain specialty chemicals used in our manufacturing process from only one
supplier of each such material. Alternate chemical products are available from
other sources but process chemical changes would often require requalification
of the processes, which could take weeks or months to complete. We mitigate
these risks by identifying stable companies with leading technology and delivery
positions and by attempting to qualify two suppliers for all critical raw
materials and components.




Sales,
Marketing and Customer Support




We
sell and market our products directly to a number of industries requiring
electronic interconnects through the use of an internal sales staff. In
addition, we utilize sales representatives on a limited basis in several Asian
countries where it is advantageous to be represented locally. Historically, we
have sold a substantial portion of our flexible circuit interconnects to a
limited number of customers. We have benefited from early entry as a supplier to
the disk drive industry and have been able to leverage our relationships to
supply other integrated flexible circuit interconnects. Our relationships
combined with our reputation for high standards of quality and innovative
manufacturing processes have established us as a predominant supplier of
interconnects for the HDD industry.




We
provide our customers' product design support from our locations in Minnesota
and Thailand and from our sales and customer support offices in California,
China, Singapore and the United Kingdom. In addition, we provide on-site
customer design support for our customers as required.




Even
though our customer mix will change from period to period, we expect that sales
to relatively few customers will continue to account for a high percentage of
our net sales in the foreseeable future. Sales to our three largest customers,
TPO, Seagate and Hitachi constituted 43%, 23% and 22% of net sales,
respectively, for fiscal 2008, 11%, 66% and 17% of net sales, respectively, for
fiscal 2007 and 14%, 73% and 6% of net sales, respectively, for fiscal
2006.  Seagate acquired Maxtor in May 2006 and have combined their
operations.  The merger of Philip’s Mobile Display Systems business
unit with Toppoly Optoelectronics Corporation of Taiwan to create a new company
called TPO was announced in November 2005 and completed in June
2006.




Sales to
our five largest customers constituted 97%, 99% and 94% of net sales forfiscal 2008, 2007 and 2006, respectively.  The
loss of a significant customer or a substantial reduction in orders by any
significant customer, including reductions due to market, economic or
competitive conditions in the computer, computer peripheral, mobile
communication devices and consumer markets has had and may continue to have a
material adverse effect on our business, financial condition and results of
operations.




Environmental
Controls




Flexible
circuit interconnect manufacturing requires the use of chemicals. As a result,
we are subject to a variety of environmental laws relating to the storage,
discharge, handling, emission, generation, manufacture, use and disposal of
chemicals, solid and hazardous waste and other toxic and hazardous materials
used to manufacture our products.  We believe we have been operating our
facilities in substantial compliance in all material respects with existing
environmental laws and regulations. However, we cannot predict the nature, scope
or effect of legislation or regulatory requirements that could be imposed or how
existing or future laws or regulations will be administered or interpreted with
respect to products or activities to which they have not previously been
applied. For this reason, we implemented procedures geared toward minimizing the
negative impacts and reducing potential financial risks arising from
environmental issues. Compliance with more stringent laws or regulations, or
more vigorous enforcement policies of regulatory agencies could require
substantial expenditures by us and could adversely affect our business, results
of operations and financial condition. We do not anticipate any material amount
of environmental-related capital expenditures in fiscal 2009.




7




Intellectual
Property




We
believe that, due to our customers' demands for rapid technological advances and
the resulting limited product life cycles, the success of our business generally
depends more on the technical and engineering expertise, creativity and
marketing and service abilities of our employees than on patents, trademarks and
copyrights. Nevertheless, we own patents and have a policy of seeking patents
when appropriate on inventions concerning new products and improvements as part
of our ongoing research, development and manufacturing activities. There can be
no assurance that any patents issued to us or licensed by us will provide a
competitive advantage or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on our ability to do business.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate our products or design around the patents
issued to us or licensed by us. In addition, there can be no assurance that
foreign intellectual property laws or our agreements will protect our
intellectual propertyrights in any foreign country.
Any failure to protect our intellectual property rights could have a material
adverse effect on our business, results of operations and financial
condition.




We
had a 35% investment in AKI, the company that developed the unique manufacturing
process technology utilized by our FSA products. Although we have sold our
equity position in AKI we continue to have a license to use this technology in
our products for disk drive applications until 2012. The rights granted to us by
AKI are royalty-bearing and may not be sublicensed without the consent of
AKI.




Employees




As
of September 27, 2008, we had a total of 3,306 employees. Of these, 3,282
employees were based in Thailand, 12 were based in the U.S., and 12 were based
in other Asian and European locations. Our future operating results depend in
part upon our ability to attract and retain other qualified management,
technical, manufacturing, sales and support personnel for our operations.
Competition for such personnel is intense and there can be no assurance that we
will be successful in attracting or retaining such personnel. The failure to
attract or retain such persons could materially adversely affect our business,
results of operations and financial condition.




Competition




The
flexible circuit interconnect market is differentiated by customers, markets and
geography with each niche having its own combination of complex packaging and
interconnection requirements. We believe the market competes principally on the
basis of design capability, price, quality, flexibility and technological
advancements in underlying applications. During periods of economic slowdown in
the electronics industry and other periods when excess capacity exists,
electronic OEMs become more price sensitive. We believe that once a
customer has selected a particular vendor to design and manufacture a flexible
circuit interconnect, the customer generally relies upon that vendor's design
for the life of that specific application and, frequently, subsequent
generations of similar applications. Accordingly, it is difficult to achieve
significant sales to a particular customer with respect to any application once
another vendor has been selected to design and manufacture the flexible circuit
interconnect used in that application. While this market paradigm may provide a
barrier to our competitors in the markets served by us, it also may present an
obstacle to our entry into other markets.




The
flexible circuit interconnect market is highly competitive. We experience
competition world-wide from a number of leading foreign and domestic providers
including 3M Company for high-end technology applications, and NOK ("Nippon
Mektron"), Fujikura Ltd., Multi-Fineline Electronix, Inc. ("M-Flex")
and Sumitomo for standard flex and assembly applications. 3M, Sumitomo, NOK and
Fujikura are substantially larger than us and possess greater financial and
other resources. There are a number of other flexible circuit manufacturers that
target other flexible circuit markets and rarely compete directly with us.
Expansion of our existing products or services could expose us to new
competition. Moreover, new developments in the consumer electronics industry
could render existing technology obsolete or less competitive and could
potentially introduce new competition into the market. There can be no assurance
that our competitors will not develop enhancements to, or future generations of,
competitive products or services that will offer superior price or performance
features to those offered by us or that new competitors will not enter our
markets. Finally, as many of our competitors are based in foreign countries,
they have cost structures and prices based on foreign currencies. Accordingly,
currency fluctuations could cause our U.S. dollar-priced products to be less
competitive than our competitors' products priced in other currencies.




8





Backlog




The
backlog for our continuing operations was $12.1 million, $14.1 million
and $21.6 million at September 27, 2008, September 29, 2007 and September
30, 2006, respectively. Our backlog fluctuates based on the timing of the
receipt of orders from customers. Backlog is defined by us as firm orders that
are scheduled to be delivered within 12 months from the date of the order.
While we believe substantially all of our current backlog will be delivered
within 12 months, customers may determine not to release orders into
production, may extend requested delivery dates or cancel orders. In such cases,
we may not realize the revenue indicated by the backlog.




Item
1A.  RISK FACTORS




An investment in our common stock
involves a high degree of risk. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties that we are
unaware of, or that we may currently deem immaterial, may become important
factors that harm our business, financial condition or results of operations. If
any of the following risks actually occurs, our business, financial condition or
results of operations would be materially adversely affected. In that case, the
trading price of our common stock could decline, and you may lose all or part of
your investment.





As
a result of our history of operating losses, inadequate operating cash flow and
net capital deficiency, our auditors have substantial doubt about our ability to
continue as a going concern. Our ability to continue as
a going concern depends upon our ability to obtain additional financing, secure
new customers and increase sales to existing customers.




We have experienced significant
operating losses in each fiscal year since 2000, including net losses from
continuing operations of $28.0 million for fiscal 2008.  As of
September 27, 2008, we had a working capital deficit of $31.2
million.  We have minimal financial resources, and our cash flow from
operating activities continues to be insufficient to meet our operating needs
and debt service obligations. As a result of these factors, among others, our
independent public accountants have substantial doubt about our ability to
continue as a going concern. Our consolidated financial statements do not
include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that may
be necessary as a result of this uncertainty. As a result of receiving this
opinion from our independent public accountants, we may experience possible
adverse effects from our customers, on our creditworthiness, or on investor
confidence, any of which may have a material adverse effect on our business and
the trading price of our common stock.





Our ability to continue as a going
concern depends upon our ability to obtain additional financing, our success in
securing new customers and increasing sales to existing customers, as well as
our ability to improve our liquidity, whether through cash generated by
operations or through incurring additional debt or the issuance of debt or
equity.  Our management has and will continue to implement operational
measures designed to address our operation and cash flow
objectives.  In addition, management may seek waivers of covenants
under our credit facilities or forbearances on interest or principal
payments.  However, there can be no assurance that we will be
successful in improving our business, obtaining waivers or other accommodations
from our lenders or obtaining additional debt or equity on terms acceptable to
us, if at all.




We
have experienced ongoing losses from operations and we rely on our existing
credit facilities to finance cash required for our operations.




We
had net losses from continuing operations of $28.0 million for fiscal 2008 and
have experienced losses from operations in each fiscal year since 2000.
Operating activities used $8.9 million and $17.6 million during the years ended
September 27, 2008 and September 29, 2007, respectively.  As of
September 27, 2008, we had a working capital deficit of $31.2
million.  Whether we achieve a sufficient level of net income to fund
our operations will depend on a number of factors, including:


• the level of revenue in any given
period;


• our expense levels, particularly for
manufacturing costs;


•our manufacturing
efficiency, particularly with respect to new product introductions and high
volume products;


•
increasing revenue from existing AFC and FPD customers;


• cultivating new AFC and FPD customers;
and


• the qualification of new products,
including new semiconductor packaging, smart cards, phone camera modules and
printer flex products.




9




We have
historically financed our operations primarily through bank credit facilities,
and, to a lesser extent, cash from operating activities.  From time to
time, we have also received cash from sales of equity securities and employee
stock option exercises. Cash and equivalents were $6.5 million at September
27, 2008 and $10.5 million at September 29, 2007.  As of
September 27, 2008, our indebtedness under our Thai bank credit facilities
consisted of:




·
            Long-term
      debt of $19.0 million, less current maturities of $3.5 million;
      and




·
            Short-term
      debt of $32.7 million; and




Total
unused availability as of September 27, 2008 was approximately $2.5 million
under our packing credit and short-term working capital facilities. Our ability
to draw funds under the packing credit facility depends upon presenting
qualifying customer purchase orders to the banks.




Because of
the limited availability under our short-term packing credit facility, if we are
unable to provide our lenders with qualifying purchase orders, we will not be
able to obtain additional funds for our operations from this credit
facility.  Moreover, the amount currently available under our Thai
credit facilities is insufficient to fund our ongoing operations.  We
must increase the income generated from our operations to fund our ongoing cash
needs and to service our indebtedness.




We may not be
able to generate sufficient cash flow to service our outstanding debt and fund
operations.




Our ability to satisfy our obligations
to pay interest and to repay debt depends on the performance of our business.
Our performance depends, in part, on our ability to secure new customers,
generate significant revenue from existing and new customers, manage expenses
(in particular manufacturing expenses) and maintain manufacturing efficiency, as
well as general economic conditions and other factors over which we have little
control. To the extent that we use a portion of our cash flow from operations to
pay the principal of, and interest on our indebtedness, that cash flow will not
be available to fund future operations and capital
expenditures.  Historically, we have not generated sufficient cash
flow from operations to fund both our operations and debt
service.  Our operating cash flow will not be sufficient to fund our
future capital expenditure and debt service requirements or to fund future
operations unless we increase revenues significantly.  We cannot
assure you that we will generate sufficient cash flow from operations to enable
us to service or reduce our indebtedness or to fund our other liquidity
needs.




If we do
not generate sufficient cash flow from our operations in an amount that
significantly exceeds the cash flow generated from our operations in prior
fiscal years, our ability to make required payments on our debt will be impaired
and may result in payment or covenant defaults, acceleration of our
indebtedness, seizure by the banks of assets that secure our indebtedness, loss
of control of our business or bankruptcy. This could
also create additional concern with our customers that may reduce orders
allocated to us and impact our ability to maintain current business levels or
even reduce future business expansion.


The
current severe downturn and uncertainty in the global economy in general and
weakness in the disk
drive and telecommunications industries in particular may harm our
business and operating results.




The
worldwide economy is currently undergoing unprecedented turmoil amid stock
market volatility, tightening of credit markets, concerns of inflation and
deflation, decreased consumer confidence, reduced corporate profits and capital
spending, adverse business conditions and liquidity concerns and business
insolvencies. This turmoil and the uncertainty about future economic conditions
could negatively impact our customers and, among other things, postpone their
decision-making, decrease their spending and jeopardize or delay their ability
or willingness to make payment obligations, any of which could adversely affect
our business. We cannot predict the timing, strength or duration of this severe
global economic downturn or subsequent recovery.




We
manufacture electrical components, primarily flexible circuit interconnects, for
the computer, data storage, consumer, medical, telecommunications and other
electronic industries.  If the demand for products incorporating our
flexible circuit interconnects declines significantly, or customer spending for
those products declines, our revenue will be adversely affected. Challenging
economic conditions also may impair the ability of our customers to pay for
products and services they have purchased. As a result, reserves for doubtful
accounts and write-offs of accounts receivable may increase.




If
the general economy and the disk drive and telecommunications industries do not
improve, our business, financial condition and results of operations could be
harmed.




10




We need
additional capital to continue and grow our business, which may not be
available.




Our
ability to execute our long-term strategy depends on our ability to obtain
additional working capital.  While we are attempting to generate
capital through increasing income and cash flow from our operations, we have an
immediate need for additional debt or equity capital to fund our existing
operations and to grow our business.  We may also need to identify and
secure capital to refinance our existing indebtedness at the maturity of 2012 or
earlier, if required repayment of our debt is accelerated because of a payment
or covenant default.




We may seek additional capital by
incurring additional indebtedness or from an offering of our equity securities
or both.  No assurance can be given that additional working capital will be
obtained in an amount that is sufficient for our needs, in a timely manner or on
terms and conditions acceptable to us.  Our financing needs are
based upon management estimates as to future revenue and expense.  Our
business plan and financing needs are also subject to change based upon, among
other factors, market and industry conditions, our ability to increase
cash flow from operations and our ability to control costs and
expenses. Our efforts to raise additional funds from the sale of
equity may be hampered by depressed trading price of our common stock and the
fact that our common stock is listed on the Pink Sheets. Our efforts to raise
funds by incurring additional indebtedness may be hampered by the fact
that we have significant outstanding indebtedness and the challenges we
face in servicing our current indebtedness with cash flow from operations, as
well as the fact that our assets are pledged to our lenders to secure
existing debt.  In addition, the covenants of our credit agreement
restrict our ability to make distributions, create liens, incur indebtedness,
and sell our assets and properties.   The following factors may
also affect our ability to obtain additional financing on favorable terms, or at
all:


• our results of operations, financial
condition and business prospects;


•conditions in the disk
drive industry as well as the telecommunications market;


• general
economic conditions, including the availability of credit and lending standards
of banks and other financial institutions; and


• the perception in the capital markets of
our business.




If
we are unable to obtain sufficient capital, we may further curtail our capital
expenditures, further reduce research and development expenditures, or suspend
or discontinue our operations.  Our ability to make required payments
on our debt may also be impaired, which may result in payment or covenant
defaults, acceleration of our indebtedness, seizure by the banks of assets that
secure our indebtedness, loss of control of our business or
bankruptcy.




Our sales are
concentrated in a small customer base and in the HDD
industry.




Sales
to our largest customer from fiscal 2008 constituted 43% of net sales for fiscal
2008, 11% for fiscal 2007 and 14% for fiscal 2006.  Sales in fiscal
2008 to our second largest customer, which historically was our largest
customer, constituted 23% of net sales for fiscal 2008, 66% for fiscal 2007 and
73% for fiscal 2006, respectively. Sales to our five largest customers
constituted 97%, 99% and 94% of net sales for fiscal 2008, 2007 and 2006,
respectively. Our largest customer historically, discontinued use of our FSA
product during our fiscal 2008 second quarter.  As a result, sales to
this customer decreased substantially during fiscal 2008.  The loss of
FSA sales to this customer had a material adverse effect on our business and the
loss of one or more of our major customers or a substantial reduction in orders
by any other significant customer, for any reason, could have a material adverse
effect on our business, financial condition and results of
operations.  Various factors, many of which are outside our control,
could cause a loss of customers or reduction in orders including market,
economic or competitive conditions in the computer, computer peripheral, mobile
communication device and high-end consumer markets, the development by a
customer of the capability to produce flexible circuits in high volume for its
own products, a transfer of manufacturing operations by a customer to a
lower-cost country, a change in the type of interconnect or suspension assembly
used by our largest customers or the failure of a customer to pay its account
balance with us.




Sales of
our FSA and AFC products to the hard disk drive industry accounted for 51%, 84%
and 80% of our net sales in fiscal 2008, 2007 and 2006, respectively. The disk
drive industry is intensely competitive and technology changes rapidly. The
industry's demand for disk drive components also fluctuates. The disk drive
industry experiences periods of increased demand and rapid growth followed by
periods of oversupply and subsequent contraction. These cycles may affect
suppliers to this industry because disk drive manufacturers tend to order more
disk drive components than they may need during growth periods, and reduce
orders for these components during periods of
contraction.  Fluctuations in the hard disk drive industry may result
in fluctuations in our operating results, but these fluctuations are difficult
to predict and are likely to vary in the future.




11
 
  Our
second largest customer in fiscal 2008 and largest customer historically,
discontinued use of our FSA products during the fiscal 2008 second
quarter.




Because
our largest customer has increased utilization of alternative interconnect
technology that competes with our FSA product, our FSA product reached the end
of its life during our fiscal 2008 second quarter and revenue generated from FSA
product decreased substantially.  Sales of our FSA product accounted
for 12%, 49% and 58% of our net sales in fiscal 2008, 2007 and 2006,
respectively.  Revenue generated from the sale of our FSA product was
$8.7 million, $43.3 million and $100.4 million in fiscal 2008, 2007 and 2006
respectively.   The value added or revenue excluding pass-through
components portion of the FSA product relates to the flexible circuit of the FSA
which we manufacture.  FSA revenue excluding pass-through components
has ranged from 34% to 37% of the FSA selling price in the past three fiscal
years.  The remaining non-value added portion of the FSA product
selling price is related to the cost of the suspension attached to the flexible
circuit.  To date, increases in revenue excluding pass-through
components from other products have not been sufficient to replace the decreases
in FSA revenue excluding pass-through.  As a result, we have taken a
number of steps to reduce our cost structure including the closure of our U.S.
manufacturing facilities.  Our business has been adversely impacted by
the reduction of FSA revenue and if we cannot increase our revenue excluding
pass-through to replace the reductions in FSA revenue excluding pass-through or
reduce our cost structure to correspond to decreases in revenue excluding
pass-through, our business, financial condition and results of operations will
continue to be materially adversely affected.




Our financing
agreements contain restrictive covenants with which we may not be able to
comply.




We
have entered into financing agreements that contain restrictive financial
covenants. These covenants require us, among other things, to maintain specified
levels of net income, tangible net worth and interest and leverage ratios, and
also impose certain limitations on additional indebtedness, leases, guarantees
and the payment of dividends. Our ability to comply with restrictive financial
covenants depends upon our future operating performance. Our future operating
performance depends, in part, on general industry conditions and other factors
beyond our control.  We cannot be sure that we will be able to comply
with these covenants in the future, and we may not be successful in
renegotiating our financing agreements or otherwise obtaining relief from thecovenants. If we default under some or all of our
financing agreements, our lenders may require that we immediately repay the full
outstanding amount we owe to them. In such event, we may have to pursue
alternative financing arrangements, which may not be timely available to us, if
at all.




Our common stock
is currently listed on the Pink Sheets, which may result in negative impacts on
our stock price and make our stock illiquid.




Until
August 4, 2008, our common stock was listed on the Nasdaq Stock Market
system.  The Nasdaq Capital Market suspended trading in our common
stock effective August 4, 2008.  Beginning on August 4, 2008, our
common stock was quoted on the Pink Sheets under the symbol of
“INVX.PK”.




Because
our common stock is quoted on the Pink Sheets, it is subjected to the rules
promulgated under the Securities Exchange Act of 1934 relating to “penny
stocks.” These rules require brokers who sell securities that are subject to the
rules, and who sell to persons other than established customers and
institutional accredited investors, to complete required documentation, make
suitability inquiries of investors and provide investors with information
concerning the risks of trading in the security. Consequently, since our common
stock is quoted on the Pink Sheets, we believe an investor may find it more
difficult to buy or sell our common stock in the open market and investors may
have a difficult time making transactions in our common stock because of the
lack of market to do so. There can be no assurance that our common stock may be
sold without a significant negative impact on the price per share or that any
market will exist for our common stock.




Our
selling prices are subject to pricing pressure from our customers and market
pressure from our competitors.




We
deal with a limited number of large customers who are able to exert significant
pricing pressure on our products. Our selling prices are affected by changes in
overall demand for our products, changes in the specific products our customers
buy and our products' life cycles. A typical life cycle for our products begins
with higher pricing when a product is introduced and decreasing prices as it
matures. To offset price decreases during a product's life, we rely primarily on
higher sales volume and improving our manufacturing yield and productivity to
reduce a product's cost. We must reduce our manufacturing costs as prices
decline during our products' life cycles in order to generate income from
operations.





12




The
markets in which we operate are highly competitive.




We
operate in highly competitive markets and our competitors can be expected to
continue to improve the design and performance of their products and to
introduce new products with competitive price/performance characteristics. Competitive pressures
often necessitate price reductions that adversely affect operating results. We
will be required to make a continued high level of investment in product
development and research, sales and marketing and ongoing customer service and
support to remain competitive. In addition, our ability to effect price
reductions or otherwise respond to competitive pressures is limited because of
our need to generate cash flow from operations to service our debt
obligations.  The competitive pressures we face have had and may
continue to have a material adverse effect on our business, financial condition
and results of operations.




Our
operating results are subject to fluctuations.




Our
past operating results, and our gross margins, have fluctuated from fiscal
period to fiscal period. Our future operating results and gross margins may
continue to fluctuate from fiscal period to fiscal period due to a number of
factors, many of which are outside our control and any of which could cause our
stock price to fluctuate.




The
primary factors that affect us include the following:


• changes in overall demand for our
products; •technological changes that
change disk drive demand;





• changes in expected customer timing of
new product introductions;


• changes in OEM customer manufacturing
yields throughout their products' life cycles;


• changes in the specific products our
customers buy;


• changes in our selling
prices;


• changes in utilization of our production
capacity;


• changes in our infrastructure
costs;


• changes in our manufacturing process, or
problems related to our manufacturing process;


• changes in our manufacturing
yields;


• changes in our production
efficiency;


• long
disruptions in operations at any of our plants for any reason; and


• changes
in the cost of, or limits on, available materials and labor.




Difficulties
in forecasting demand for our products make it challenging to utilize our
capacity efficiently.




If
customer demand for our actuator flex, display flex, stacked memory flex or tape
storage flex products weakens, or if one or more customers reduce, delay or
cancel orders, our business, financial condition and results of operations would
be materially adversely affected. The end of life of our FSA product and
corresponding decreases in our FSA revenue have resulted in us taking a number
of steps to reduce our cost structure related to underutilized
capacity.  These steps have included the closure of our U.S. based
manufacturing facilities.   To regain lost FSA revenue, we must
increase our revenue from other products. We must also reduce our cost structure
to correspond to decreases in revenue.




We
typically allow customers to change or cancel orders on short notice. We plan
our production and inventory based primarily on forecasts of customer demand,
including forecasts of customer pulls of product out of our just-in-time
inventory hubs. Our customers typically prefer a dual source supply, and
therefore allocate their demand among suppliers. Both customer demand and the
resulting forecasts often fluctuate substantially. These factors, among others,
create an environment where scheduled production and capacity utilization can
vary significantly from week to week, leading to variability in gross
margins.




The
following factors complicate accurate capacity planning for market
demand:


• changes in the specific products our
customers buy;


• the pace of technological
change;


• variability in our manufacturing yields
and productivity; and • long lead times for most of our plant
and equipment expenditures, requiring major financial commitments well in
advance of actual production requirements.







We
have at times increased our production capacity and the overhead that supports
production based on anticipated market demand which has not always developed as
expected. Our inability to plan our capacity requirements accurately, or our
failure to put in place the technologies and capacity necessary to meet market
demand, could have a material adverse effect on our business, financial
condition and results of operations.




13




Competing
technologies have resulted in the end of our FSA product and may reduce demand
for our other products.




Flexible
circuit interconnects provide electrical connections between components in
electrical systems and are used as a platform to support the attachment of
electronic devices. While flexible circuits offer several advantages over
competing printed circuit board and ceramic hybrid circuit technologies, our
customers may consider changing their designs to use these alternative
technologies for future applications. In particular, our largest customer in
fiscal 2007 increased utilization of an alternative interconnect technology that
competes with our FSA products and our FSA product reached its end of life in
our fiscal 2008 second quarter. If our customers switch significant portions of
their business to alternative technologies, our business, financial condition
and results of operations could be materially adversely affected.




Future
technological innovations may reduce demand for disk drives. Data storage
alternatives that compete with disk drive-based data storage currently exist.
These storage alternatives include semiconductor (flash) memory, tape memory and
optical (DVD and CD) drives. The current core technology for disk drive data
storage has been the dominant technology in the industry for many years. This
technology could be replaced by an alternate technology in the future. Our
business, financial condition and results of operations could be materially
adversely affected if the computer industry adopts technology that replaces disk
drives as a computer data storage medium.




To meet industry
requirements and remain competitive, we must continue to improve our process
capabilities and develop and qualify new products.




Our
continued success depends on our ability to continue to develop manufacturing
processes that are capable of tighter tolerances and to develop and rapidly
bring to volume production new products that meet increasingly higher
performance specifications. A number of risks are inherent in this process.
Increasingly higher performance specifications, as well as transitions to new
product platforms and materials, initially can lower our overall manufacturing
yields and efficiencies. This in turn can cause us to delay or miss product
shipments. We also may incur higher manufacturing costs and sales returns or we
may need to change or develop new manufacturing processes. If processes change,
we may need to replace, modify or design, build and install equipment. These
changes may require additional capital.




We
may need to increase our research and development and engineering expenses to
support technological advances and to develop and manufacture new products and
product features. We expect future flexible circuits to require higher
performance specifications and thinner or tighter lines and spaces and to
incorporate new material sets.




If
we fail to successfully introduce new products or product features on a regular
and timely basis, demand for our existing products could decline, and our
business, financial condition and results of operations could be materially
adversely affected. If higher performance specifications and tighter lines and
spaces are required and we are not able to meet those requirements, our
business, financial condition and results of operations could be materially
adversely affected.




We
must qualify our products with our customers. The qualification process for
these products can be time-consuming, complex and difficult. We cannot be sure
that our products will continue to be selected for design into our customers'
products. If we are unable to obtain additional customer qualifications, or if
we cannot qualify our products for high volume production quantities, our
business, financial condition and results of operations would be materially
adversely affected.




We may not be
able to manufacture our products efficiently due to changes in demand or
technology, or other unforeseen events.




We
manufacture a wide variety of products with different selling prices and
manufacturing costs. Our product mix varies weekly as market demand changes. Any
substantial variation in product mix can lead to changes in utilization of our
equipment and tooling, inventory obsolescence and overstaffing in certain areas,
all of which could adversely impact our business, financial condition and
results of operations.




Rapid
technological change in the various electronics industries we serve has led to
numerous design changes and tighter performance specifications. The resulting
new product designs with tighter performance specifications initially are more
difficult to manufacture, could require additional capital expenditures and may
require increased development and support expenses. Manufacturing yields and
efficiencies also vary from product to product. Newer products typically have
lower initial manufacturing yields and efficiencies as we commence volume
manufacturing and thereafter ramp to full production. We have experienced sales
returns in the past and as we commence volume manufacturing, as new features for
our products are introduced or as new manufacturing processes are implemented,
we may experience increased sales returns in the future. We cannot be sure that
we will attain our output goals and be profitable with regard to any of our new
products.




14




Our
manufacturing plant is located in Lamphun, Thailand, which can experience severe
weather. Severe weather has, at times, resulted in lower production and
decreased our shipments.




We may not be
able to adequately protect our intellectual property.




We
attempt to protect our intellectual property rights through patents, copyrights,
trade secrets and other measures. We may not, however, be able to protect our
technology adequately. In addition, competitors may be able to develop similar
technology independently. Our success depends in large part on trade secrets
relating to our proprietary manufacturing processes. We seek to protect these
trade secrets and our other proprietary technology in part by requiring each of
our employees to enter into non-disclosure and non-competition agreements. In
these agreements, the employee agrees to maintain the confidentiality of all of
our proprietary information and, subject to certain exceptions, to assign to us
all rights in any proprietary information or technology made or contributed by
the employee during his or her employment. In addition, we regularly enter into
non-disclosure agreements with third parties, such as consultants, suppliers and
customers. These agreements may, however, be breached, and we may not have an
adequate remedy for any such breach. In addition, our competitors may otherwise
learn or independently develop our trade secrets.




We
believe that the patents we hold, control and may obtain are valuable, but that
they will not independently determine our success. Moreover, we may not receive
patents for our pending patent applications, and our issued patents may not be
broad enough to protect our technology adequately. We compete in industries with
rapid development and technological innovation. We cannot be sure that we will
be able to protect our future technology or that any patent issued to us will
not be challenged, invalidated, circumvented or infringed. In addition, we have
only limited patent rights outside the United States, and the laws of certain
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States.




Defending against
intellectual property claims may have a material adverse effect on our
business.




We
and certain users of our products, have received, and may receive,
communications from third parties asserting patent claims against us or our
customers that may relate to our manufacturing equipment or to our products or
to products that include our products as a component. If any third party makes a
valid infringement claim against us and we are unable to obtain a license on
terms acceptable to us, our business, financial condition and results of
operations could be materially adversely affected. We expect that, as the number
of patents issued continues to increase, the volume of intellectual property
claims made against us could increase.




We may have
difficulty obtaining an adequate supply of raw materials at reasonable
prices.




We
currently can obtain certain types of photoresist, a liquid compound used in the
photoetching process, certain polyimide materials and certain specialty
chemicals used in our manufacturing process from only one supplier of each such
material. If we could not obtain the materials referred to above in the
necessary quantities, with the necessary quality and at reasonable prices, our
business, financial condition and results of operations could be materially
adversely affected.




The loss of key
personnel could adversely affect our business.




Our
success depends upon the efforts, contributions and abilities of our senior
management. We cannot be sure that the services of our key personnel will
continue to be available to us. The loss of services of any of these employees
could have a material adverse effect on our business, financial condition and
results of operations.




Our corporate
restructuring plan might have a negative effect on our efforts to maintain our
customers and product quality.


On October
1, 2007, we announced that we are implementing a corporate restructuring plan
intended to reduce costs and improve the efficiency of our
operations.   As part of that plan, we relocated some of our
corporate business functions, including administrative, sales and engineering,
to Lamphun, Thailand.  We retained key Executives, sales, engineering
and finance resources in the U.S. and other countries to support our customers
as well as the business requirements of being a U.S. publicly listed
company.


There are
several risks inherent in our efforts, including the risk that cost-cutting
plans will impair our ability to effectively develop new products, to remain
competitive, and to operate effectively, which could have a negative effect on
our efforts to maintain our customers or on product quality.  We may
not be able to retain key employees and if we are not able to retain key
employees, we may not have sufficient resources to successfully manage our
business in the U.S. or in other parts of the world.
  15


Our
corporate restructuring could have long-term effects on our business, decreasing
or slowing product development, making it more difficult for us to respond to
customers and maintain product quality, and limiting our ability to hire and
retain key personnel. If any of the risks associated with our corporate
restructuring plan materialize, our business, financial condition and results of
operations could be materially adversely affected.


We face risks
from doing business internationally.




We
have manufacturing facilities in Thailand and design, sales and customer support
operations in the United States, United Kingdom, Taiwan, Singapore, China and
South Korea. Our business is subject to certain risks inherent in international
business, many of which are beyond our control. These risks
include:


• changes in local regulatory
requirements, including restrictions on product content; • changes in the laws and policies
affecting trade, investment and taxes (including laws and policies relating to
the repatriation of funds and to withholding taxes);





• differing degrees of protection for
intellectual property;


• foreign labor
issues;


• difficulties in coordinating and
managing foreign operations;


• potential cross border shipment
delays;


• instability of foreign economies and
governments;


• cultural barriers;
and


• wars and acts of
terrorism.




These risks associated with foreign operations may have a
material adverse effect on our ability to manufacture our product, may increase
costs associated with manufacturing or other aspects of our business, and may
disrupt our business or the business of our suppliers, vendors or
lenders.  We also cannot predict the future impact or the consequences
to our business as a result from the unstable political situation in
Thailand.




We face risks
from fluctuations in the value of foreign currency versus the U.S. dollar and
the cost of currency exchange.




While
we transact business predominantly in U.S. dollars, a large portion of our debt,
sales and expenses are denominated in foreign currencies. Changes in the
relation of foreign currencies to the U.S. dollar will affect our cost of sales
and operating margins and could result in exchange losses. To reduce the impact
of certain foreign currency fluctuations, we enter into short-term forward
foreign currency exchange contracts in the regular course of business. The
forward exchange contracts generally require us to exchange Thailand baht for
U.S. dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to
at inception of the contracts. These contracts are not designed as hedges,
therefore, the gains and losses on foreign currency transactions are included in
income as incurred.  Our Thailand debt is denominated in Thai baht,
and as a result, we have a significant short position in Thai
baht.   We made the decision in fiscal 2007 to reduce the level
of forward contracts we place to purchase Thai baht to offset this short
position because of the short term cash risks associated with placing these
contracts.  As a result, large changes in the value of the U.S. dollar
versus the Thai baht will drive significant foreign currency valuation gains or
losses as the value of our baht denominated debt increases or decreases. No
assurance can be given that our strategies will prevent future currency
fluctuations from having a material adverse effect on our business, financial
condition and results of operations.




We
may not be able to maintain good relations with our employees.




Our
ability to conduct business would be impaired if our workforce were to be
unionized or if a significant number of our specialized employees were to leave
and we could not replace them with comparable personnel. Our business may be
adversely affected if we need to adjust the size of our workforce due to
fluctuating demand. The locations of our plants and the broad span and
technological complexity of our products and processes limit the number of
satisfactory engineering and other candidates for key positions.




We could incur
substantial costs as a result of violations of or liabilities under
environmental laws.




Our
operations are subject to laws and regulations relating to the protection of the
environment, including those governing the discharge of pollutants into the air
or water, the management and disposal of hazardous substances or wastes and the
cleanup of contaminated sites. Some of our operations require environmental
permits and controls to prevent and reduce air and water pollution, and these
permits are subject to modification, renewal and revocation by issuing
authorities. We could incur substantial costs, including cleanup costs, fines
and civil or criminal sanctions and third-party claims for property damage and
personal injury as a result of violations of or liabilities under environmental
laws or non-compliance with environmental permits.




16




Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and stock price.




Section
404 of the Sarbanes-Oxley Act requires annual management assessments of the
effectiveness of our internal controls over financial reporting. If we fail to
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
Failure to achieve and maintain an effective internal control environment could
have a material adverse effect on our stock price.






Item 1B.  UNRESOLVED STAFF COMMENTS




None.




Item 2.  PROPERTIES




At
September 27, 2008, we owned an aggregate of approximately 381,100 square feet
of manufacturing and other space. Our significant facilities are as
follows:




Function
                    
                    Location (number of
facilities)
                    
                    SquareFeetCurrently
      not utilized but held for capacity expansion
                    
                    Korat,
      Thailand (two)
                    
                    55,100Circuit
      finishing and assembly, sales and support
                    
                    Lamphun,
      Thailand (three)
                    
                    141,800
                      88,600
                      19,600Held
      for disposition
                    
                    Litchfield,
      Minnesota (three)
                    
                    15,000
                      10,000
                      51,000




Our Korat
manufacturing locations have not been utilized for production since our FSA
product reached its end of life in the fiscal 2008 second
quarter.  The facilities are being held for future capacity
expansion.  We have a purchase agreement in place to sell our
Litchfield facilities.  The prospective buyer of the Litchfield
facilities is currently leasing the facilities until they are able to obtain
financing, at which time the sale is expected to close.




Item 3.  LEGAL PROCEEDINGS




We
are not party to any lawsuits.




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




We did not
submit any matter to a vote of our security holders during the fourth quarter of
the fiscal year covered by this Annual Report.


17


Item 4A.  EXECUTIVE OFFICERS OF
REGISTRANT




Below are the name, age,
position and a brief account of the business experience of each of our executive
officers and key employees as of September 27, 2008.




Name
                            
                            Age
                            
                            Position(s)Terry M. Dauenhauer
                            
                            55
                            
                            President and Chief Executive OfficerRandy L. Acres
                            
                            44
                            
                            Senior Vice President and Chief Financial
      OfficerBrian R. Dahmes
                            
                            48
                            
                            Vice President,
Technology




Terry
Dauenhauer joined Innovex, Inc. in January 2004 as Senior Vice President
and Chief Operating Officer. Mr. Dauenhauer was named President and Chief
Executive Officer on December 15, 2007.  Prior to joining Innovex, he
spent five years with Seagate Technology as Vice President of Thailand
Operations and World Wide Product Performance.  Prior to that, he was
President and Director, AlphaSource Electronics, Alphatel, Alphatec Electronics
and NS Electronics from 1993 to 1997.  Mr. Dauenhauer held various
positions with National Semiconductor from 1987 to 1993, Fairchild Semiconductor
from 1983 to 1987 and Texas Instruments from 1976 to 1983.




Randy Acres
joined Innovex, Inc. as the Senior Vice President and Chief Financial Officer in
March 2008.  Prior to joining Innovex, Mr. Acres was the Vice
President of Business Development for Asia Pacific for Applix,
Inc.  Prior to that, he was the Chief Financial Officer for Symbol
Technologies, Inc. and Broadcade Communications for Asia
Pacific.  Additionally, Mr. Acres has more than 11 years experience
with various divisions of IBM, including assignments in Thailand and China as
the Chief Financial Officer of IBM Storage Products.  Mr. Acres has
spent 8 of the last 10 years in various organizations with responsibility
throughout the Asia region and has extensive experience in both business and
financial activities.




Brian
Dahmes joined us in July 1997 as Plant Manager. Mr. Dahmes was
promoted to Director of Manufacturing in July 1998 and to Vice President,
Quality in March of 1999. In November 1999, he was promoted to Vice
President, Managing Director Innovex (Thailand). In August 2001,
Mr. Dahmes was named Vice President, Research and Development and in August
2005 he was named Vice President, Technology. From 1992 to 1995, Mr. Dahmes
served as Process Engineering Manager for Sheldahl, Inc., and from 1995 to
1997 he was an Engineering Manager with Sheldahl, Inc.




18




PART II




Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




Performance Graph




The graph below sets forth a comparison of the cumulative
shareholder return of the Company’s common stock over the last five fiscal years
with the cumulative total return over the same periods for the Nasdaq Stock
Market (U.S. and Foreign Companies) Index and the Nasdaq Electronic Components
Index.  The graph compares the cumulative total return of the
Company’s common stock as of the end of each of the Company’s last five fiscal
years on $100 invested as of September 27, 2003, assuming the reinvestment of
all dividends:













2003
                                2004
                                2005
                                2006
                                2007
                                2008Innovex, Inc.
                                $100.00
                                $40.90
                                $42.71
                                $20.90
                                $12.46
                                $2.81Nasdaq
                                  Electronic
                                  Components
                                100.00
                                87.71
                                93.68
                                95.84
                                124.24
                                90.01Nasdaq Stock
                                  Market
                                100.00
                                108.55
                                121.29
                                128.27
                                154.45
                                125.77






Common Stock Information




Our common stock is traded on the Pink Sheets system of the
Pink OTC Markets Inc. under the symbol "INVX.PK". As of September 27, 2008,
there were 19,418,799 shares of common stock outstanding, held by approximately
411 shareholders of record.


19


Price Range of Common Stock




The table below sets
forth the high and low sale prices of our Common Stock as reported on the Nasdaq
National Market from October 1, 2007 through to August 1, 2008 and the Pink
Sheets system from August 6, 2008 through to September 27,
2008.




2008
                            
                            2007High
                            
                            Low
                            
                            High
                            
                            LowFirst Quarter
                            
                            $
                            1.25
                            
                            $
                            0.57
                            
                            $
                            2.54
                            
                            $
                            1.70Second Quarter
                            
                            
                            0.98
                            
                            
                            0.16
                            
                            
                            2.40
                            
                            
                            1.74Third Quarter
                            
                            
                            0.84
                            
                            
                            0.20
                            
                            
                            1.91
                            
                            
                            1.33Fourth Quarter
                            
                            
                            0.71
                            
                            
                            0.20
                            
                            
                            1.57
                            
                            
                            0.82




Dividend Policy




We currently intend to retain all available funds, after repayment
of the debt, to support our operations and to finance growth and development of
our business.  We do not anticipate paying any cash dividends in the
foreseeable future.  Any future determination relating to the dividend
policy will be made at the discretion of our board of directors and will depend
on a number of factors, including our future earnings, credit facility
restrictions, capital requirements, financial condition, future prospects and
other factors as the board of directors may deem relevant.




Securities Authorized for Issuance Under Equity Compensation
Plans




The following table
sets forth information regarding our equity compensation plans in effect as of
September 27, 2008.  Each of our equity compensation plans is an
"employee benefit plan" as defined by Rule 405 of Regulation C of the Securities
Act of 1933.




Plan category
                
                Number of shares of common
                  stock to be issued upon
                  exercise of outstanding
                  options, warrants and rights
                
                
                Weighted-average exercise
                  price of outstanding
                  options, warrants and
                  rights
                
                
                Number of shares of common
                  stock remaining available for
                  future issuance under equity
                  compensation plans(1)Equity compensation
                  plans approved by
                  stockholders:
                
                
                1,638,175
                
                
                
                $2.29
                
                
                
                1,210,076Equity compensation
                  plans not approved by
                  stockholders:
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                1,638,175
                
                
                
                $2.29
                
                
                
                1,210,076


(1) Excludes shares of stock listed in first
column.





The equity compensation plans approved by our shareholders are the
1987 Employee Stock Option Plan, 1994 Stock Option Plan, and the 2000 Restricted
Stock Plan.


20


Item 6.  SELECTED CONSOLIDATED FINANCIAL
DATA




The
following selected consolidated financial data as of the end of each fiscal year
has been derived from our consolidated financial statements for each of the
years in the five-year period ended September 27, 2008. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes appearing elsewhere in this
report.




For
      the Years EndedSeptember
      27
                                                                            2008
                                                                          
                                                                          September
      29,
                                                                            2007
                                                                          
                                                                          September 30,
                                                                            2006
                                                                          
                                                                          October
      1,
                                                                            2005
                                                                          
                                                                          October
      2,
                                                                            2004(In
      thousands, except per share data)Consolidated
      Statement of Operations Data:Net
      sales
                                                                          $
                                                                          71,039
                                                                          
                                                                          $
                                                                          87,844
                                                                          
                                                                          $
                                                                          173,144
                                                                          
                                                                          $
                                                                          200,247
                                                                          
                                                                          $
                                                                          155,946Cost
      of sales
                                                                          
                                                                          80,113
                                                                          
                                                                          
                                                                          90,531
                                                                          
                                                                          
                                                                          154,353
                                                                          
                                                                          
                                                                          185,285
                                                                          
                                                                          
                                                                          137,976Gross
      profit (loss)
                                                                          
                                                                          (9,074)
                                                                          
                                                                          
                                                                          (2,687)
                                                                          
                                                                          
                                                                          18,791
                                                                          
                                                                          
                                                                          14,962
                                                                          
                                                                          
                                                                          17,970Operating
      expenses:Selling,
      general, administrative and
                                                                            Royalty
                                                                          
                                                                          9,263
                                                                          
                                                                          
                                                                          12,320
                                                                          
                                                                          
                                                                          15,994
                                                                          
                                                                          
                                                                          16,165
                                                                          
                                                                          
                                                                          17,781Engineering
                                                                          
                                                                          2,472
                                                                          
                                                                          
                                                                          3,448
                                                                          
                                                                          
                                                                          5,144
                                                                          
                                                                          
                                                                          6,970
                                                                          
                                                                          
                                                                          6,613Restructuring
      and goodwill impairment
                                                                          
                                                                          3,827
                                                                          
                                                                          
                                                                          9,857
                                                                          
                                                                          
                                                                          14,768
                                                                          
                                                                          
                                                                          2,771
                                                                          
                                                                          
                                                                          14,789Net
      (gain) loss on sale of assets
                                                                          
                                                                          (125)
                                                                          
                                                                          
                                                                          1,266
                                                                          
                                                                          
                                                                          (2,890)
                                                                          
                                                                          
                                                                          745
                                                                          
                                                                          
                                                                          (32)Total
      operating expenses
                                                                          
                                                                          15,437
                                                                          
                                                                          
                                                                          26,891
                                                                          
                                                                          
                                                                          33,016
                                                                          
                                                                          
                                                                          26,651
                                                                          
                                                                          
                                                                          39,151Loss
      from operations
                                                                          
                                                                          (24,511)
                                                                          
                                                                          
                                                                          (29,578)
                                                                          
                                                                          
                                                                          (14,225)
                                                                          
                                                                          
                                                                          (11,689)
                                                                          
                                                                          
                                                                          (21,181)Interest
      and other expense
                                                                          
                                                                          (3,472)
                                                                          
                                                                          
                                                                          (2,558)
                                                                          
                                                                          
                                                                          (2,736)
                                                                          
                                                                          
                                                                          (438)
                                                                          
                                                                          
                                                                          (367)Loss
      before provision for
                                                                            income
      taxes
                                                                          
                                                                          (27,983)
                                                                          
                                                                          
                                                                          (32,136)
                                                                          
                                                                          
                                                                          (16,961)
                                                                          
                                                                          
                                                                          (12,127)
                                                                          
                                                                          
                                                                          (21,548)Benefit
      (provision) for income taxes
                                                                          
                                                                          (18)
                                                                          
                                                                          
                                                                          (11)
                                                                          
                                                                          
                                                                          (9)
                                                                          
                                                                          
                                                                          (12,860)
                                                                          
                                                                          
                                                                          4,052Net
      loss
                                                                          $
                                                                          (28,001)
                                                                          
                                                                          $
                                                                          (32,147)
                                                                          
                                                                          $
                                                                          (16,970)
                                                                          
                                                                          $
                                                                          (24,987)
                                                                          
                                                                          $
                                                                          (17,496)Net
      loss per shareBasic
                                                                          $
                                                                          (1.44)
                                                                          
                                                                          $
                                                                          (1.66)
                                                                          
                                                                          $
                                                                          (0.88)
                                                                          
                                                                          $
                                                                          (1.30)
                                                                          
                                                                          $
                                                                          (0.92)Diluted
                                                                          $
                                                                          (1.44)
                                                                          
                                                                          $
                                                                          (1.66)
                                                                          
                                                                          $
                                                                          (0.88)
                                                                          
                                                                          $
                                                                          (1.30)
                                                                          
                                                                          $
                                                                          (0.92)





For the Years
      EndedSeptember 27,
                                    2008
                                  
                                  September 29,
                                    2007
                                  
                                  September 30,
                                    2006
                                  
                                  October 1,
                                    2005
                                  
                                  October 2,
                                    2004(In
      thousands)Consolidated
      Balance Sheet Data:Total
      assets
                                  
                                  $
                                  69,157
                                  
                                  
                                  $
                                  79,360
                                  
                                  
                                  $
                                  94,167
                                  
                                  
                                  $
                                  137,826
                                  
                                  
                                  $
                                  129,747Long-term
      debt, less current maturities
                                  
                                  
                                  18,970
                                  
                                  
                                  
                                  15,549
                                  
                                  
                                  
                                  19,800
                                  
                                  
                                  
                                  27,818
                                  
                                  
                                  
                                  11,022Stockholders'
      equity (deficit)
                                  
                                  
                                  (13,801
                                  )
                                  
                                  
                                  13,928
                                  
                                  
                                  
                                  45,509
                                  
                                  
                                  
                                  61,377
                                  
                                  
                                  
                                  87,082





21




Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




You should read the following
discussion of our financial condition and results of operations in conjunction
with the consolidated financial statements and notes to those statements
included elsewhere in this report.  This discussion may contain
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, such as those set forth under Part I,
Item 1A “Risk Factors” of this Annual Report on Form 10-K and elsewhere in this
report..




We utilize a fiscal year that ends
on the Saturday nearest to September 30. For clarity of presentation, we
have described all periods as if they end at the end of the calendar
quarter.




Overview




We
are a worldwide provider of flexible circuit interconnect solutions to original
equipment manufacturers ("OEMs"), in the electronics industry. We offer a full
range of customized flexible circuit applications and services from initial
design, development and prototype to fabrication, assembly and test on a global
basis. We target high volume markets where miniaturization, form and weight are
driving factors and flexible circuits are an enabling technology. Applications
for flexible circuits currently addressed by us include data storage devices
such as hard disk drives ("HDDs"), flat panel displays (“FPD”) including liquid
crystal displays ("LCDs") for mobile communication devices, tape drives and
printers. Our customers include Entorian, Hitachi, HP, TPO, Quantum, SAE
Magnetics (a subsidiary of TDK), Samsung, Seagate, StorageTek, Western Digital
and other leading electronic OEMs.




Net
Sales and Revenue Recognition




We
manufacture flexible circuits and perform certain additional assembly and test
functions on these flexible circuits based on customer specifications. We sell
our products direct throughout the world, primarily in North America, Europe and
the Pacific Rim countries. We use non-exclusive sales representatives to augment
our direct sales efforts, with sales through distributors represented 13% of our
total net sales for fiscal 2008 and less than 3% of net sales for fiscal years
2007 and 2006. We recognize revenue from the sale of our products upon shipment
or delivery of our product to our customers, depending on the customer agreement
or shipping terms. We store some inventory in third party owned warehouses that
are located close to customers' manufacturing facilities. Sales from third party
warehouses are recognized upon the transfer of title and risk of loss, following
the customer's acknowledgment of the receipt of the goods.




Costs
and Expenses




Cost
of sales consists primarily of:




• material costs for raw materials and
semi-finished components used for assembly of our products;


• labor costs directly related to
manufacture, assembly and inspection of our products;


•
costs of general utilities,
production supplies and chemicals consumed in the manufacturing
processes;


• costs related to the maintenance of our
manufacturing equipment and facilities;


• costs related to material and product
handling and shipment; • depreciation costs related to
facilities, machinery and equipment used to manufacture, assemble and inspect
our products; and





• salaries and overhead attributed to our
supply chain, process engineering and manufacturing
personnel.




Selling,
general, administrative and royalty expenses primarily consist of:


• salaries and related selling
(commissions, travel, business development and program management),
administrative, finance, regulatory, information services and executive
personnel expenses;
 • other significant expenses related to
external accounting, software maintenance and legal and regulatory
fees;








•overhead attributed to our
selling, general and administrative personnel; and


•royalties related to FSA
net sales




Engineering
expenses include costs associated with the design, development and testing of
our products and processes. These costs consist primarily of:




• salaries and related development
personnel expenses;


• overhead attributed to our development
and test engineering personnel; and


•prototyping costs related
to the development of new products.





22




Restructuring
charges are those costs primarily related to manufacturing facility closures,
severance and product discontinuations. On October 1, 2007, we announced a plan
to relocate our corporate offices to Thailand and discontinue manufacturing
activity at our Korat, Thailand location as the Flex Suspension Assembly product
reached its end of life during the fiscal 2008 second quarter.  On
January 16, 2006, we announced a plan to transfer our high volume manufacturing
operations from Litchfield, Minnesota to Thailand.  On September 25,
2006, we announced a plan to accelerate the end of life production for our FSA
flexible circuits in Litchfield and discontinue the use of that facility by the
end of March 2007.  Concurrently, we also planned to accelerate the
end of life production of flexible circuit laminate material at our Eastlake,
Ohio facility and reduce indirect labor and general and administrative expenses
at our other U.S. and Thailand locations.  In the third quarter of
fiscal 2004, we announced the planned closure of our Maple Plain, Minnesota
facility and the plan to discontinue the support of the FSA attachment process
once all program qualifications at that time reached their end of
life.




Results
of Operations






The
following table sets forth certain operating data as a percentage of net sales
for the periods indicated:




For the Years
      Ended,September 27,
      2008
                                                          
                                                          
                                                          September 29,
      2007
                                                          
                                                          
                                                          September 30,
      2006Net
      sales
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          100.0
                                                          %Cost
      of sales
                                                          
                                                          
                                                          112.8
                                                          
                                                          
                                                          
                                                          103.1
                                                          
                                                          
                                                          
                                                          89.1Gross profit
      (loss)
                                                          
                                                          
                                                          (12.8
                                                          )
                                                          
                                                          
                                                          (3.1
                                                          )
                                                          
                                                          
                                                          10.9Operating
      expenses:Selling,
      general, administrative and royalty
                                                          
                                                          
                                                          13.0
                                                          
                                                          
                                                          
                                                          14.0
                                                          
                                                          
                                                          
                                                          9.3Engineering
                                                          
                                                          
                                                          3.5
                                                          
                                                          
                                                          
                                                          3.9
                                                          
                                                          
                                                          
                                                          3.0Restructuring
      and asset impairment
                                                          
                                                          
                                                          5.4
                                                          
                                                          
                                                          
                                                          11.2
                                                          
                                                          
                                                          
                                                          8.5Net
      (gain) loss on sale of assets
                                                          
                                                          
                                                          (0.2
                                                          )
                                                          
                                                          
                                                          1.5
                                                          
                                                          
                                                          
                                                          (1.7
                                                          )Total
      operating expenses
                                                          
                                                          
                                                          21.7
                                                          
                                                          
                                                          
                                                          30.6
                                                          
                                                          
                                                          
                                                          19.1Loss
      from operations
                                                          
                                                          
                                                          (34.5
                                                          )
                                                          
                                                          
                                                          (33.7
                                                          )
                                                          
                                                          
                                                          (8.2
                                                          )Net
      interest and other expense
                                                          
                                                          
                                                          (4.9
                                                          )
                                                          
                                                          
                                                          (2.9
                                                          )
                                                          
                                                          
                                                          (1.6
                                                          )Loss
      before provision for income taxes
                                                          
                                                          
                                                          (39.4
                                                          )
                                                          
                                                          
                                                          (36.6
                                                          )
                                                          
                                                          
                                                          (9.8
                                                          )Benefit
      (provision) for income taxes
                                                          
                                                          
                                                          (0.0
                                                          )
                                                          
                                                          
                                                          (0.0
                                                          )
                                                          
                                                          
                                                          (0.0
                                                          )Net
      loss
                                                          
                                                          
                                                          (39.4
                                                          )%
                                                          
                                                          
                                                          (36.6
                                                          )%
                                                          
                                                          
                                                          (9.8
                                                          )%




Comparison
of the Fiscal Years Ended September 27, 2008 and September 29,
2007




Net
Sales




Our net
sales were $71.0 million for the year ended September 27, 2008, compared to
$87.8 million for the year ended September 29, 2007, a decrease of
19%.  This decrease primarily reflects lower flex suspension assembly
(FSA) revenue, with a smaller decrease in actuator flex circuit (AFC)
revenue.  The decline in FSA revenue from $43 million to $9 million in
fiscal 2008 reflects the completion of our FSA customer’s transition to their
next generation of desktop disk drive products which uses an alternative
technology.  Fiscal 2008 FPD revenue of $31 million increased
significantly from $10 million in fiscal 2007 related to many new generation
programs entering production at our largest FPD customer.  These new
FPD programs began ramping during the fourth quarter of fiscal 2007 with new
programs continuing to come on line during the fiscal year 2008.  AFC
revenue decreased by $3 million  to $27 million in fiscal 2008, driven
by first quarter production issues reducing our product allocation at a
significant customer and the delay in the expected production ramp up for our
new AFC  customer until the fiscal 2008 fourth quarter.




23




FPD
application net sales generated 44% of our net sales for fiscal 2008, compared
to 11% for fiscal 2007. Sales of AFC’s to the disk drive industry were 38% of
our net sales in fiscal 2008, compared to 35% in fiscal 2007.  FSA
sales to the disk drive industry were 12% of net sales, compared to 49% and
sales from integrated circuit packaging, network system application and other
industry applications were 6% compared to 5% for the fiscal years ended
September 27, 2008 and September 29, 2007, respectively.




Gross
Profit (Loss)




Our
gross loss was $9.1 million for the fiscal year ended September 27,
2008 compared to $2.7 million for the fiscal year ended September 29, 2007.
Our gross margin for the fiscal year ended September 27, 2008 decreased to
(13%), compared to (3%) for the fiscal year ended September 29, 2007. The
decrease in gross profit and gross margin as compared to the prior year reflects
the decreased fixed cost absorption driven by lower revenue resulting in a
higher level of excess manufacturing capacity and short-term incremental costs
incurred while addressing operating issues related to new product ramp ups and
the introduction of a new material set. Spending levels were lower as a result
of cost reductions related to the transfer of operations from the U.S.
facilities to our Thailand facilities, but not low enough to offset the impact
of the lower revenue.




Selling,
General, Administrative and Royalty




Selling,
general, administrative and royalty expenses for the fiscal year ended
September 27, 2008 were $9.3 million, a decrease of 25% from $12.3
million for the fiscal year ended September 29, 2007. As a percentage of
net sales, selling, general, administrative and royalty expenses were 13% in
fiscal 2008 and 14% for fiscal 2007. The dollar decrease in selling, general and
administrative expenses from the prior year primarily reflects lower payroll
expenses related to reductions in U.S. sales and administrative positions and a
$500,000 reduction in royalty expense related to the reduction in FSA revenue.
The decrease as a percentage of net sales from the prior year primarily also
reflects the lower payroll
expenses.




Engineering




Engineering
expenses for the fiscal year ended September 27, 2008 were
$2.5 million, compared to $3.4 million for the fiscal year ended
September 29, 2007, a decrease of 26%. The decrease in engineering expenses
in fiscal 2008 was primarily the result of transferring engineering positions to
our lower salary base Thailand facility related to our U.S. facility closures.
As a percentage of net sales, engineering expenses were 3.5% of sales in fiscal
2008 and 3.9% in fiscal 2007.




Restructuring
and Goodwill Impairment




Corporate
office restructuring




On October
1, 2007, we announced a plan to relocate some of our our corporate functions to
Thailand and discontinue manufacturing activity at our Korat, Thailand facility
as the FSA product was expected to reach its end of life by the end of the
fiscal 2008 second quarter.  The restructuring was triggered by the
previous move of our manufacturing operations to Thailand and the presence of
our banking sources and many of our customers and suppliers in
Asia.  In addition, incremental cost reductions are required for us to
return to profitability.




While
several actions related to the restructuring plan remain open, all of the
expected savings have been realized as of September 27, 2008.  The
actions resulted in annual operating expense reductions of approximately $6.5
million based on a comparison of the fiscal 2008 fourth quarter selling, general
and administrative spending and Korat plant spending adjusted for unusual
expenses to the fixed cost structure in place during the fiscal 2007 fourth
quarter.  Approximately $6.2 million of the annualized savings will
have a positive impact on cash flow.  These cash related savings are
comprised of $4.2 million related to compensation reductions and $2.0 million
related to other spending.  The $0.3 million remaining savings are
depreciation related and have no impact on cash flow.




Asset
impairment charges of $400,000 related to the plan were recorded in the fiscal
2007 fourth quarter.  The impaired assets were primarily equipment
used in the FSA manufacturing process at the Korat facility.  The
assets were written down to their estimated net realizable value which is
negligible as a result of their age and specialized nature.  Total
cash related restructuring charges excluding asset impairments of approximately
$3.7 million are expected related to the plan.  The $3.7 million is
comprised of $3.1 million for one-time termination benefits and $0.6 million
related to moving and closing costs associated with transferring some of the
corporate functions to Thailand and transferring equipment from Korat, Thailand
to Lamphun, Thailand. Restructuring charges of $3.2 million related to the
transferring of some of the corporate functions and Korat restructuring were
recorded in fiscal 2008. These charges were comprised of $3.0 million one time
termination benefits and $200,000 for moving and closing costs.  Total
restructuring charges related to the corporate office restructuring through
September 27, 2008 were $3.6 million.  These charges were comprised of
$3.0 million for one time termination benefits, $200,000 for moving and closing
costs and $400,000 of asset impairment charges.  Most of the remaining
anticipated expenditures related to the plan of approximately $500,000 are
expected to be incurred prior to the end of the fiscal 2009 second
quarter.




24




The
restructuring plan called for the elimination of 594 positions in the U.S. and
Thailand consisting of 466 direct labor positions, 97 indirect labor production
support positions and 31 administrative positions.  As of September
27, 2008, all of these positions have been eliminated.




Litchfield
and Eastlake restructuring




On January
16, 2006, we announced a plan to move prototyping and high volume manufacturing
from our Litchfield, Minnesota facilities to our Lamphun, Thailand
facilities.  On September 25, 2006, we expanded the previously
announced Litchfield restructuring to close the entire Litchfield facility and
move the remaining development efforts to our Thailand
facilities.  The plan announced in September 2006 was to accelerate
the end of life production for FSA flexible circuits in Litchfield and
discontinue use of that facility by the end of April 2007.  The plan
also included acceleration of production end-of-life at our Eastlake, Ohio
laminate material manufacturing facility.  In June 2006, as part of
the plan, we divested our low-volume etched metal product line also located at
our Litchfield facilities.  The restructuring was triggered by our
need to reduce our cost structure in order to compete effectively and as a
result of our lower than expected level of revenue.




While
several action items related to the expanded restructuring plan remain open, all
of the expected savings were realized as of September 29, 2007.  Asset
impairment charges totaling $10.1 million related to the expanded restructuring
plan were recorded in fiscal 2006. The assets that were impaired include the
Litchfield facilities and related equipment.  The fair value of these
assets was determined using appraised values.  The fair value of the
Litchfield facility impairment was determined from an independent appraisal
performed by Ruhland Commercial Consultants, Ltd.  The fair value of
the equipment located at the facilities was determined from appraisals performed
by Asset Reliance International, LLC. Assets that were not transferred to
Lamphun, Thailand were sold or disposed.  A $900,000 loss on the sale
of assets was recorded during the fiscal 2007 third quarter as the remaining
assets were sold.




Manufacturing
operations were completed in the Eastlake facility in February 2007 and
decommission of the facility was substantially completed by the end of March
2008. Manufacturing operations in the Litchfield facilities were completed
during April 2007 and decommission of the facilities was completed by the end of
the fiscal 2007 third quarter. A purchase agreement has been signed to sell the
Litchfield facilities for $2.3 million.  The sale is expected to close
after the buyer arranges financing. Efforts are being made to sublease the
Eastlake facility.




Total cash
related restructuring charges excluding asset impairments of approximately $8.8
million are expected for the Litchfield and Eastlake
restructuring.  The $8.8 million is comprised of $3.3 million for
one-time termination benefits and $5.5 million related to moving and closing
costs associated with transferring portions of the Litchfield operation to
Thailand and the disposition of the Eastlake and Litchfield facilities not being
retained.  Restructuring charges of $600,000 related to the Litchfield
and Eastlake restructuring were recorded in fiscal 2008.  Total
restructuring charges related to the Eastlake and Litchfield restructuring
excluding asset impairments charges through September 27, 2008 were $8.2
million.  These charges were comprised of $3.3 million for one time
termination benefits, $3.9 million for moving and closing costs and $1.0 million
contract termination costs related to the Eastlake facility
lease.  Remaining expenditures of approximately $600,000 are expected
as part of the plan primarily related to completing the transfer of equipment to
Thailand.




Goodwill




Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. We have determined goodwill relates to one reporting unit for
purposes of impairment testing.  Goodwill and other intangible assets
with indefinite lives are tested for impairment annually or whenever an
impairment indicator arises. Based on our analysis which included the
consideration of our stock price and operating losses generated in the past
three years, we considered our goodwill to be impaired and wrote it down from
its recorded value of $3 million to a value of $-0- as of September 29,
2007.




25




Net
(Gain) Loss on the Sale of Assets




Net gain
or loss on sale of assets for fiscal 2008 was a gain of $125,000 compared to a
loss of $1.3 million for fiscal 2007.  The change was a result of the
loss generated in fiscal 2007 on the sale or disposal of the remaining U.S
equipment that was not transferred to Thailand while fiscal 2008 included a gain
from the sale of several assets.




Net
Interest and Other Expense




Net
interest expense was $3.1 million in the fiscal year ended
September 27, 2008, compared to $2.3 million for the fiscal year ended
September 29, 2007, an increase of 35%.  The increase is the
result of higher average levels of debt outstanding during fiscal 2008 and
increase in interest rates for a portion of the year.  Net other
expense was $418,000 in the fiscal year ended September 27, 2008 as compared to
$212,000 in the fiscal year ended September 29, 2007.  The change was
a result of larger losses on foreign currency transactions occurring in fiscal
2008.




Income
Taxes




Income tax
expense for the fiscal year ended September 27, 2008 was $17,000, compared
to $11,000 for the fiscal year ended September 29, 2007.  The tax
expense for fiscal 2008 and 2007 related to state tax payments.  No
tax benefit was recorded for fiscal 2008 or 2007 as the deferred tax valuation
allowance was increased to offset the tax benefit generated during that
period.




Comparison
of the Fiscal Years Ended September 29, 2007 and September 30,
2006




Net
Sales




Our net
sales were $87.8 million for the year ended September 29, 2007, compared to
$173.1 million for the year ended September 30, 2006, a decrease of
49%.  This decrease primarily reflects lower FSA and FPD revenue, with
a smaller decrease in AFC revenue.  The decline in FSA revenue from
$100 million to $43 million in fiscal 2007 reflects our FSA customer’s
transition to their next generation of desktop disk drive products which uses an
alternative technology.  Fiscal 2007 FPD revenue of $10 million was
down from $24 million in fiscal 2006 related to our largest FPD customer
experiencing lower demand from their customers and slower than expected new
program transitions.  New FPD programs did not begin a significant
ramp up until the fourth quarter of fiscal 2007.  AFC revenue
decreased to $30 million in fiscal 2007, driven by a program transition gap in
the fiscal 2007 second and third quarters as we experienced delays at one
customer in qualifying on their next generation disk drive programs which were
ramping to volume production.




FSA sales
to the disk drive industry generated 49% of our net sales for fiscal 2007,
compared to 58% for fiscal 2006.  Sales of AFC’s to the disk drive
industry were 35%, compared to 22%, FPD application net sales were 11% compared
to 14% and sales from integrated circuit packaging, network system application
and other industry applications were 5% compared to 6% for the fiscal years
ended September 29, 2007 and September 30, 2006, respectively.




Gross
Profit (Loss)




Our
gross loss was $2.7 million for the fiscal year ended September 29,
2007 compared to a gross profit of $18.8 million for the fiscal year ended
September 30, 2006. Our gross margin for the fiscal year ended September 29,
2007 decreased to (3%), compared to 11% for the fiscal year ended
September 30, 2006. The decrease in gross profit and gross margin as
compared to the prior year reflects the decreased fixed cost absorption driven
by lower revenue resulting in a higher level of excess manufacturing capacity.
Spending levels were lower as a result of cost reductions related to the
transfer of operations from the U.S. facilities to our Thailand facilities, but
not low enough to offset the impact of the lower revenue.




Selling,
General, Administrative and Royalty




Selling,
general, administrative and royalty expenses for the fiscal year ended
September 29, 2007 were $12.3 million, a decrease of 23% as compared
to $16.0 million for the fiscal year ended September 30, 2006. As a
percentage of net sales, selling; general; administrative and royalty expenses
were 14% in fiscal 2007 and 9% for fiscal 2006. The dollar decrease in selling,
general and administrative expenses from the prior year primarily reflects lower
payroll expenses related to reductions in U.S. sales and administrative
positions and an $800,000 reduction in royalty expense related to the reduction
in FSA revenue. The increase as a percentage of net sales from the prior year
primarily reflects the decrease in revenue.




Engineering




Engineering
expenses for the fiscal year ended September 29, 2007 were
$3.4 million, compared to $5.1 million for the fiscal year ended
September 30, 2006, a decrease of 33%. The decrease in engineering expenses
in fiscal 2007 was primarily the result of transferring engineering positions to
our lower salary base Thailand facility related to our U.S. facility closures.
As a percentage of net sales, engineering expenses were 4% of sales in fiscal
2007 and 3% in fiscal 2006.




26




Restructuring
and Goodwill Impairment




Corporate
office relocation




As
discussed above, on October 1, 2007, we announced a plan to relocate our
corporate offices to Thailand and discontinue manufacturing activity at our
Korat, Thailand facilities as the FSA product reaches its end of life by the end
of the fiscal 2008 second quarter.  Asset impairment charges of
$400,000 related to the plan were recorded in the fiscal 2007 fourth
quarter.  Restructuring charges of $3.2 million related to the
corporate office and Korat restructuring were recorded in fiscal 2008. These
charges were comprised of $3.0 million one time termination benefits and
$200,000 for moving and closing costs.  Restructuring charges of
$43,000 for severance related to the plan were recorded in fiscal
2007.




Litchfield
and Eastlake restructuring




As
discussed above, on January 16, 2006, we announced a plan to move prototyping
and high volume manufacturing from our Litchfield, Minnesota facilities to our
Lamphun, Thailand facilities.  On September 25, 2006, we expanded the
previously announced Litchfield restructuring to close the entire Litchfield
facility and our Eastlake, Ohio facility. Asset impairment charges totaling
$10.1 million related to the expanded restructuring plan were recorded in fiscal
2006. A $900,000 loss on the sale of assets was recorded during the fiscal 2007
third quarter as the remaining assets were sold.  Restructuring
charges of $5.6 million related to the Litchfield and Eastlake restructuring
were recorded in fiscal 2007.  These charges were comprised of $2.4
million for one time termination benefits and $3.2 million for moving and
closing costs.




Maple
Plain restructuring




In fiscal
2004, in order to reduce our cost structure, we closed our Maple Plain facility
and consolidated its operations with our Lamphun, Thailand facility. In
addition, we planned to discontinue supporting the FSA attachment process in
order to utilize our resources in other growth areas.




As of
September 29, 2007, all of the actions and related charges under the plan were
completed and all of the expected savings were realized.  The actions
resulted in an annual operating expense reduction of approximately $9.1 million
based on a comparison of the fiscal 2007 fourth quarter spending to the fixed
cost structure in place on June 30, 2004.  Approximately $5.3 million
of the annualized savings had a positive impact on cash flow.  These
cash related savings were comprised of $1.9 million related to compensation
reductions and $3.4 million related to other spending.  The $3.8
million remaining savings were depreciation related and had no impact on cash
flow.  The impact of these reductions in our fixed cost basis was not
been evident in our operating results as a result of concurrent reductions in
revenue.




During
fiscal 2004, we recorded asset impairment of $13.1 million related to the
planned closure of the Maple Plain facility and the plan to discontinue support
of the FSA attachment process. Additional asset impairment charges of
approximately $1.0 million were recorded in fiscal 2006 related to the
disposition of the Maple Plain assets.  The Maple Plain facility was
sold in the fiscal 2007 third quarter for $4.25 million and an additional $0.8
million asset impairment charge was recorded in the fiscal 2007 second quarter
to reduce the net book value of the facility to its net realizable value. Total
asset impairment charges related to the Maple Plain restructuring since its
inception were $14.9 million. The assets that were impaired included the Maple
Plain facility and related equipment and equipment used in the FSA attachment
process.  The manufacturing operation has been transferred from the
Maple Plain facility to the Lamphun, Thailand facility.




During
fiscal 2004, we recorded restructuring charges of $1.7 million related to the
Maple Plain restructuring and additional restructuring charges of $2.8 million
were recorded in fiscal 2005.  During fiscal 2006, restructuring
charges of approximately $1.6 million were recorded under the restructuring
plan.  Excluding asset impairment charges, restructuring charges were
approximately $6.1 million.  The $6.1 million was comprised of $1.9
million for one-time termination benefits, $0.4 million for contract termination
costs and $3.8 million for other moving and closing costs associated with
closing the Maple Plain location.




Goodwill




Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. We have determined goodwill relates to one reporting unit for
purposes of impairment testing.  Goodwill and other intangible assets
with indefinite lives are tested for impairment annually or whenever an
impairment indicator arises. Based on our analysis which included the
consideration of our stock price and operating losses generated in the past
three years, we considered our goodwill to be impaired and wrote it down from
its recorded value of $3 million to a value of $-0- as of September 29,
2007.




27




Net
(Gain) Loss on the Sale of Assets




Net gain
or loss on sale of assets for fiscal 2007 was a loss of $1.3 million compared to
a gain of $2.9 million for fiscal 2006.  The change was a result of
the loss generated in fiscal 2007 on the sale or disposal of the remaining U.S
equipment that was not transferred to Thailand while fiscal 2006 included a gain
from the sale of the business, facility and assets of our Litchfield etched
metal components business.




Net
Interest and Other Expense




Net
interest expense was $2.3 million in the fiscal year ended
September 29, 2007, compared to $2.1 million for the fiscal year ended
September 30, 2006, an increase of 9%.  The increase is the
result of higher average levels of debt outstanding during fiscal
2007.  Net other expense was $212,000 in the fiscal year ended
September 29, 2007 as compared to $589,000 in the fiscal year ended September
30, 2006.  The change was a result of smaller losses on foreign
currency transactions occurring in fiscal 2007.




Income
Taxes




Income tax
expense for the fiscal year ended September 29, 2007 was $11,000, compared
to $9,000 for the fiscal year ended September 30, 2006.  The tax
expense for fiscal 2007 and 2006 related to state tax payments.  No
tax benefit was recorded for fiscal 2007 or 2006 as the deferred tax valuation
allowance was increased to offset the tax benefit generated during that
period.




Critical
Accounting Policies




Management's
Discussion and Analysis of Financial Condition and Results of Operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
sales and expenses and related disclosure of contingent assets and liabilities.
On an on-going basis, estimates are evaluated based on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.




We
apply the following critical accounting policies in the preparation of our
consolidated financial statements:




• Allowance for Excess and Obsolete
Inventory.  Inventories, which are composed of raw materials,
work in process and finished goods, are valued at the lower of cost or market
with cost being determined by the first-in, first-out method.  On a
periodic basis, we analyze the level of inventory on hand, our cost in relation
to market value and estimated customer requirements to determine whether
write-downs for excess or obsolete inventory are required.  Actual
customer requirements in any future periods are inherently uncertain and thus
may differ from estimates.  If actual or expected requirements were
significantly different than the established write-down, a revision to the
obsolescence write-down would be recorded in the period in which such a
determination was made.




• Goodwill. We have
determined goodwill relates to one reporting unit for purposes of impairment
testing.  Goodwill and other intangible assets with indefinite lives
are tested for impairment annually or whenever an impairment indicator arises.
Based on our analysis which included the consideration of our stock price and
operating losses generated in the past three years, we considered our goodwill
to be impaired and wrote it down from its recorded value of $3 million to a
value of $-0- as of September 29, 2007.





• Deferred Income
Taxes.  We account for income taxes using the liability
method.  Deferred income taxes are provided for temporary differences
between the financial reporting and tax bases of assets and
liabilities.  A valuation allowance is established where the
realization of any deferred taxes becomes less likely than not to
occur.  We analyze the valuation allowance periodically which may
result in income tax expense being different than statutory rates.





• Revenue Recognition.We make
electronic components (flexible circuits) based on customer
specifications.  Our revenue recognition policy is consistently
applied regardless of sales channels utilized and product
destination.  We have an implied warranty that the products meet our
customers’ specification.  Credits only are issued for customer
returns.  In recognizing revenue in any period, we apply the
provisions of SEC Staff Accounting Bulletin 104, "Revenue Recognition." Revenue
from product sales is recognized when persuasive evidence of an arrangement
exists, the product has been delivered, the fee is fixed and determinable and
collection of the resulting receivable is reasonably assured.  For all
sales, a binding purchase order is used as evidence of an
arrangement.  We recognize revenue from the sale of our products upon
shipment or delivery of our products to our customers, depending upon the
customer agreement or shipping terms.  We also store inventory in
warehouses (JIT hubs – third party owned warehouses) that are located close to
our customers’ manufacturing facilities.  Revenue is recognized on
sales from JIT hubs upon the transfer of title and risk of loss which follows
our customers’ acknowledgement of the receipt of the goods.





28




• Stock based Compensation. For
purposes of determining estimated fair value of stock-based payment awards on
the date of grant under SFAS 123(R), the Company used the Black-Scholes Model.
The Black-Scholes Model requires the input of certain assumptions that require
subjective judgment. Because employee stock options have characteristics
significantly different from those of traded options, and because changes in the
input assumptions can materially affect the fair value estimate, the existing
models may not provide a reliable single measure of the fair value of the
employee stock options. Management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of stock-based
compensation. Circumstances may change and additional data may become available
over time, which could result in changes to these assumptions and methodologies
and thereby materially impact our fair value determination. If factors change
and the Company employs different assumptions in the application of SFAS 123(R)
may differ significantly from what was recorded in the current
period.




Liquidity
and Capital Resources




We
have historically financed our operations primarily through cash from operating
activities, sales of equity securities, bank credit facilities and employee
stock option exercises. Cash and equivalents were $6.5 million at
September 27, 2008 and $10.5 million at September 29,
2007.




Net cash
used in operating activities was $8.9 million in the fiscal year ended
September 27, 2008.  For fiscal 2008, net cash used in operating
activities was the result of the net loss for the period and the increase in
accounts receivable more than offsetting non-cash charges and increases in
accounts payable and decreases in inventory and an increase in other current
liabilities.  In the fiscal 2008 fourth quarter as compared to the
fiscal 2007 fourth quarter, accounts receivable increased as a result of
customer mix shift from our FSA to FPD customer which had longer payment
terms.  Accounts payable increased related to improved vendor terms
and a change in the vendor mix driven by the change in customer
mix.  Other liabilities increased related to an increase in foreign
exchange forward contract accrued liability and an increase in accrued audit
fees.  Inventory decreased in line with the lower revenue and lower
capacity utilization.




Net cash
used in operating activities was $17.6 million in the fiscal year ended
September 29, 2007.  For fiscal 2007, net cash used in operating
activities was the result of the net loss for the period and the decrease in
accounts payable more than offsetting non-cash charges and decreases in accounts
receivable and inventory.  Accounts receivable, inventory and accounts
payable decreased related to the lower level of fiscal 2007 fourth quarter
revenue as compare to the fiscal 2006 fourth quarter revenue.




Net cash
provided by operating activities was $18.1 million in the fiscal year ended
September 30, 2006.  For fiscal 2006, net cash provided by operating
activities was the result of the non-cash charges and decreases in accounts
receivable and inventory more than offsetting the net loss for the period and
the decrease in accounts payable.  Accounts receivable decreased
related to improved payment terms from a significant customer and the lower
level of fiscal 2006 fourth quarter revenue.




Net cash used in investing activities was $3.1 million in
the fiscal year ended September 27, 2008, compared to net cash provided by
investing activities of $8,000 in fiscal 2007 and net cash used in investing
activities of $2.8 million in fiscal 2006.  In fiscal 2008, net cash
used in investing activities was attributed to capital spending related to
process improvements at our Thailand facility.In fiscal 2007, net cash
provided by investing activities was attributed to the $4.8 million proceeds
from the sale of the U.S. based assets including the Maple Plain facility more
than offsetting the capital spending related to process improvements at our
Thailand facility.  In fiscal 2006, net cash used in investing
activities was attributed to capital spending of $8.1 million related to the
expansion of our Thailand facility and increases in our Thailand panel
processing capability offset partially by the $5 million proceeds from the sale
of our etched metal business, facility and related equipment.




29




Net cash
provided by financing activities was $8.1 million in fiscal 2008, compared
to $18.2 million in fiscal 2007 and net cash used in financing activities of
$18.4 million in fiscal 2006. Fiscal 2008 net cash provided by financing
activities was the result of $12.2 million borrowed under our short-term
Thailand credit facilities and a $1.5 million draw down under our long term
Thailand credit facilities and a $400,000 increase in the U.S. dollar foreign
exchange valuation of the Thailand baht denominated debt partially offset by the
$6 million scheduled debt payments on our existing Thailand debt facilities and
US based debt.




Fiscal
2007 net cash provided by financing activities was the result of the $20.4
million borrowed under our short-term Thailand packing credit facilities and a
$9.0 million draw down under our new long term Thailand credit facilities and a
$2.5 million increase in the U.S. dollar foreign exchange valuation of the
Thailand baht denominated debt partially offset by the $4 million pay down of
the US facility from the Maple Plain facility sale proceeds and $9.7 million
scheduled debt payments on our existing Thailand debt facilities and US based
debt and capital leases.




Fiscal
2006 net cash used in financing activities was primarily related to the $13.9
million pay down of the balance outstanding on our short-term Thailand revolving
packing credit facility made possible by the cash provided by operations, offset
by normally scheduled debt payments and a principal payment of $1.5 million made
on June 27, 2006 related to sale of the business, facility and assets of our
etched metal components business.




In December 2006, we entered into a new
credit facility with Bank of Ayudhya Public Company Limited (BAY) and TMB Bank
Public Company Limited (TMB) which expanded our existing credit facilities with
these banks. The new Third Credit Facilities Agreement provided for an
additional 600 million baht facility to be used for procurement of equipment
within 24 months from the December 19, 2006 effective date.  We drew
down approximately $9.5 million under this new credit facility in fiscal 2007
and $1.6 million in the fiscal 2008 first and second quarters.  In
June 2004, we entered into the Second Credit Facilities Agreement with BAY and
TMB which expanded the existing credit facility with these banks.  The
Second Credit Facilities Agreement was comprised of a 660 million baht long-term
facility, a 400 million baht long-term facility, packing credit facilities
totaling 1,100 million baht, short-term working capital facilities totaling 90
million baht and a 10 million baht overdraft facility. The Thailand facilities
are secured by certain receivables, inventory and assets held by us in Thailand.
As of September 27, 2008, we had approximately $21.9 million outstanding under
our long-term Thailand credit facilities and a $32.7 million outstanding balance
under our packing and short-term Thailand credit facilities. Total unused
availability as of September 27, 2008 was approximately $2.5 million under our
packing credit and short-term working capital facilities. Utilization of the
packing credit facility availability is dependent on presenting qualifying
customer purchase orders to the banks for draw down.  As of September
27, 2008, we were in compliance with all covenants under our Thailand credit
facilities.




In June
2008, we completed the restructuring of our long-term debt facility with the
Thai lenders.  As part of the restructuring, the debt repayment
schedules were modified resulting in a $6.0 million reduction in repayments
required to be made in the remainder of the fiscal 2008 and a $9.0 million
reduction in payments required to be made in fiscal 2009.  In
addition, the undrawn portion available under the Third Credit Facilities
Agreement of 600 million baht was cancelled as part of the bank
restructuring.  No gain or loss was recorded as a result of the
restructuring because it was determined by the Company to be a modification
under EITF-96-19.




In January
2005, we entered into a financing agreement with US Federal Credit Union under
which we borrowed $4.0 million. An additional $3.1million was borrowed under
that agreement on April 15, 2005. In addition to normally scheduled payments, a
principal payment of $1.5 million was made on June 27, 2006 related to sale of
the business, facility and assets of our etched metal components business. An
additional principal payment of $4 million was made on May 18, 2007 related to
the sale of the Maple Plain facility.  As of September 27, 2008,
$568,000 was outstanding under our US Federal credit facility. While the note is
due February 1, 2010, the final payment is scheduled to be made during the
fourth quarter of fiscal 2009 as a result of the prepayments. Payments under the
underlying note are calculated using a 25 year amortization with the remaining
principal amount due at maturity. The note is secured by our Litchfield
facilities and any proceeds from the sale of those facilities will be used to
pay down the outstanding note balance.




We believe
our ability to continue as a going concern depends upon our ability to obtain
additional financing, our success in securing new customers and increasing sales
to existing customers, as well as our ability to improving our liquidity,
whether through cash generated by operations or through incurring additional
debt or the issuance of debt or equity. We are considering alternatives for
generating additional working capital and long-term financing and will continue
to pursue financing opportunities to better leverage our assets. Our financing
needs and the financing alternatives available to us are subject to change
depending on, among other things, general economic and market conditions,
changes in industry buying patterns, customer demand for our products, our
ability to meet our loan covenant requirements and cash flow from operations.
Our ability to repay debt and interest depends on our ability to increase sales
and our ability to generate cash flow from operations. If we do not generate
sufficient cash flow from our operations, our ability to make required payments
on our debt will be impaired and may result in payment or covenant defaults,
acceleration of our indebtedness, seizure by the banks of assets that secure our
indebtedness, loss of control of our business or bankruptcy.




30




Contractual
Obligations






The table below discloses a summary of the Company’s specified contractual
obligations at September 27, 2008 (in thousands):




Under
      1 Year
                            
                            
                            1
      to 3 Years
                            
                            
                            3
      to 5 Years
                            
                            
                            After
      5 Years
                            
                            
                            TotalLong-term
      Debt Obligations (1)
                            
                            $
                            3,538
                            
                            
                            $
                            11,167
                            
                            
                            $
                            7,803
                            
                            
                            $
                            —
                            
                            
                            $
                            22,529Operating
      Leases
                            
                            
                            348
                            
                            
                            
                            640
                            
                            
                            
                            203
                            
                            
                            
                            26
                            
                            
                            
                            1,217Purchase
      orders
                            
                            
                            836
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            836Total
                            
                            $
                            4,743
                            
                            
                            $
                            11,806
                            
                            
                            $
                            8,007
                            
                            
                            $
                            26
                            
                            
                            $
                            24,582




(1)
Includes interest at fixed rate of 7% on a portion of the debt and excludes
interest on all debt with variable interest rates.




Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or
SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS No. 141(R) is effective
for fiscal years beginning after December 15, 2008. The adoption of SFAS
No. 141(R) would change the Company’s accounting treatment for business
combinations on a prospective basis beginning in the period it is
adopted.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities--an amendment of FASB Statement No. 133" ("FAS 161"). FAS
161 changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in FAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company
does not expect the provisions of FASB 161 to have a material impact on the
Company's consolidated financial statements.





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurement(SFAS
157). This standard clarifies the principle that fair value should be based on
the assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company does not expect the implementation of SFAS 157 will have a material
impact on its results of operations or financial condition.





The
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 159, Fair Value Option for Financial
Assets and Financial Liabilities(SFAS 159). This standard addresses
earnings volatility caused by existing accounting standards that require related
financial assets and liabilities to be measured using different measurement
attributes (such as historical cost and fair value). SFAS 159 is intended to
improve financial reporting by giving all entities the option to recognize most
financial assets and liabilities and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected should be reported in earnings. SFAS 159 is effective for the first
quarter of our fiscal 2009 beginning October 1, 2008. We do not expect SFAS 159
to have a material effect on our financial condition or results of
operations.




31




Forward
Looking Statements




Statements
included in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations, elsewhere in this report and in future filings by the
Company with the SEC, except for the historical information contained herein and
therein, are “forward-looking statements” that involve risks and uncertainties.
These risks and uncertainties include: AFC and FPD revenue may not increase
enough to offset decreases in our FSA revenue, any interruption in the
operations of the Company’s single source suppliers or any failure of any of the
Company’s single source suppliers to timely deliver an adequate supply of
components, the timely availability and acceptance of new products, the impact
of competitive products and pricing, changes in our customers’ market share,
impact of restructuring charges, changes in manufacturing efficiencies,
continued cash availability under our credit facilities, fluctuations in foreign
currency rates and other risks detailed from time to time in our reports filed
with the Securities and Exchange Commission, including those risks described
under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the
year ended September 27, 2008. In addition, a significant portion of the our
revenue is generated from the disk drive, flat panel display, stacked memory
substrate, consumer electronics and data storage industries and the global
economic softness has had and may have in the future, an adverse impact on our
operations. We disclaim any obligation subsequently to revise any
forward-looking statements to reflect subsequent events or circumstances or the
occurrence of unanticipated events.




ITEM 7A:   QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK




The
following discusses our exposure to market risk related to changes in interest
rates and foreign currency exchange rates. These exposures may change over time
as business practices evolve and could have a material adverse impact on our
business, financial condition and results of operations.




Our
earnings and cash flows are subject to fluctuations due to changes in foreign
currency exchange rates. While we transact business predominately in U.S.
dollars a portion of our sales and expenses are denominated in foreign
currencies. Changes in the relation of foreign currencies to the U.S. dollar
will affect our cost of sales and operating margins and could result in exchange
gains or losses. To reduce the impact of certain foreign currency fluctuations,
we enter into short-term forward foreign currency exchange contracts in the
regular course of business to manage our risk exposure, not as speculative
instruments. Typically, these contracts have maturities of 6 months or
less. The forward exchange contracts generally require us to exchange Thailand
baht for U.S. dollars or U.S. dollars for Thailand baht at maturity, at rates
agreed to at inception of the contracts. These contracts are not designated as
hedges, therefore, the gains and losses on foreign currency transactions are
included in income. Our Thailand debt is denominated in Thai baht, and as a
result, we have a significant short position in Thai baht.   We
made the decision in fiscal 2007 to reduce the level of forward contracts we
place to purchase Thai baht to offset this short position because of the short
term cash risks associated with placing these contracts.  As a result,
large changes in the value of the U.S. dollar versus the Thai baht will drive
significant foreign currency valuation gains or losses as the value of our baht
denominated debt increases or decreases.




We
periodically review the outlook for expected currency exchange rate movements as
well as the policy on desired future foreign currency cash flow positions (long,
short or balanced) for those currencies in which we have significant activity.
Expected future cash flow positions and strategies are continuously
monitored.  At September 27, 2008, we had an open forward exchange
contract to buy Thailand baht maturing December 4, 2008 with a notional amount
of 230 million baht and a US equivalent of approximately $6.8
million.  No assurance can be given that our strategies will prevent
future currency fluctuations from adversely affecting our business, financial
condition and results of operations.




We
are exposed to interest rate risk as a large portion of our interest-bearing
debt is subject to interest rates which fluctuate with changes in market
interest rates or are periodically reset based on market interest rates. A large
change in market interest rates could have an adverse impact on our business,
financial condition and results of operations.






32





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




Report
      of Independent Registered Public Accounting Firm as of September 27, 2008
      (regarding Financial Statements)
              
              34Report
      of Independent Registered Public Accounting Firm as of September 29, 2007
      and September 30, 2006 (regarding Financial Statements)
              
              35Consolidated
      Balance Sheets as of September 27, 2008 and September 29,
      2007
              
              36Consolidated
      Statements of Operations for the years ended September 27, 2008:
      September 29, 2007 and September 30, 2006
              
              37Consolidated
      Statements of Stockholders' Equity (Deficit) for the years ended
      September 27, 2008; September 29, 2007 and September 30,
      2006
              
              38Consolidated
      Statements of Cash Flows for the years ended September 27, 2008;
      September 29, 2007 and September 30, 2006
              
              39Notes
      to Consolidated Financial Statements
              
              40Quarterly
      Financial Data (unaudited)
              
              52














33





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM









Board of
Directors and Stockholders


Innovex,
Inc.


Minneapolis,
Minnesota




We have
audited the accompanying consolidated balance sheet of Innovex, Inc. and
subsidiaries (the Company) as of September 27, 2008, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for the period then ended. In connection with our audit of the financial
statements, we have also audited the accompanying Schedule II Valuation and
Qualifying Accounts for the period ended September 27, 2008.  These
consolidated financial statements and schedule are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements and
schedule.  We believe that our audit provides a reasonable basis for
our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Innovex, Inc. at September
27, 2008, and the results of its operations and its cash flows for the period
then ended, in
conformity with accounting principles generally accepted in the United States of
America.




Also, in
our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note N to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit, has not provided operating cash flow and has
a  net capital deficiency that raise substantial doubt about its
ability to continue as a going concern.  Management’s plans in regard
to these matters are also described in Note N.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





/s/ BDO
SEIDMAN LLP








Milwaukee,
Wisconsin


December
22, 2008


34




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM










Board of
Directors and Shareholders


Innovex,
Inc.





We have
audited the accompanying consolidated balance sheet of Innovex, Inc. and
subsidi­aries (the Company) as of September 29, 2007, and the related
con­solidated state­ments of operations, stockholders’ equity, and cash
flows for each of the two years in the period ended September 29,
2007.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material mis­statement.  An
audit includes examining, on a test basis, evidence supporting the amounts and
dis­closures in the financial statements.  An audit also includes
assessing the accounting prin­ciples used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Innovex, Inc. and subsidiaries as of September 29, 2007, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 29, 2007 in conformity with
accounting principles generally accepted in the United States of
America.




As stated
in Note N, “Liquidity”, of the consolidated financial statements, the
Com­pany has suffered recurring losses from operations and has historically
financed its operations through cash from operating activities and bank credit
facilities.  The Company’s financing alternatives are also described
in Note N.




Our audits
were conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole.  The accompanying Schedule II
is presented for purposes of additional analysis and is not a required part of
the basic financial statements.  The informa­tion for each of the
two years in the period ended September 29, 2007 in this schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.






/s/ GRANT
THORNTON LLP








Minneapolis,
Minnesota


December
12, 2007




35







INNOVEX, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS




As
      ofSeptember
      27,
                                              2008
                                            
                                            September
      29,
                                              2007ASSETSCurrent
      assets:Cash
      and equivalents
                                            
                                            $
                                            6,531,588
                                            
                                            
                                            $
                                            10,453,803Accounts
      receivable, less allowance for doubtful accounts of $190,000
      (2007—$217,000)
                                            
                                            
                                            14,345,259
                                            
                                            
                                            
                                            13,742,477Inventories
                                            
                                            
                                            9,999,019
                                            
                                            
                                            
                                            11,055,082Spare
      Parts
                                            
                                            
                                            745,193
                                            
                                            
                                            
                                            801,048Other
      current assets
                                            
                                            
                                            1,130,848
                                            
                                            
                                            
                                            1,659,151Total
      current assets
                                            
                                            
                                            32,751,907
                                            
                                            
                                            
                                            37,711,561Property,
      plant and equipment—at cost:Land
      and land improvements
                                            
                                            
                                            2,524,093
                                            
                                            
                                            
                                            2,610,132Buildings
      and leasehold improvements
                                            
                                            
                                            22,102,689
                                            
                                            
                                            
                                            21,981,057Machinery
      and equipment
                                            
                                            
                                            65,999,108
                                            
                                            
                                            
                                            63,052,207Office
      furniture and fixtures
                                            
                                            
                                            410,875
                                            
                                            
                                            
                                            410,87591,036.765
                                            
                                            
                                            
                                            88,054,271Less
      accumulated depreciation and amortization
                                            
                                            
                                            56,599,372
                                            
                                            
                                            
                                            49,239,311Net
      property, plant and equipment
                                            
                                            
                                            34,437,393
                                            
                                            
                                            
                                            38,814,960Assets
      held for sale
                                            
                                            
                                            1,927,318
                                            
                                            
                                            
                                            2,058,308Other
      long term assets
                                            
                                            
                                            40,173
                                            
                                            
                                            
                                            775,593Total
      assets
                                            
                                            $
                                            69,156,791
                                            
                                            
                                            $
                                            79,360,422LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilities:Current
      maturities of long-term debt
                                            
                                            $
                                            3,537,803
                                            
                                            
                                            $
                                            11,049,170Line
      of credit
                                            
                                            
                                            32,665,016
                                            
                                            
                                            
                                            20,433,958Accounts
      payable
                                            
                                            
                                            23,306,317
                                            
                                            
                                            
                                            14,865,174Accrued
      compensation
                                            
                                            
                                            1,786,275
                                            
                                            
                                            
                                            1,805,567Other
      accrued liabilities
                                            
                                            
                                            2,692,488
                                            
                                            
                                            
                                            1,729,392Total
      current liabilities
                                            
                                            
                                            63,987,899
                                            
                                            
                                            
                                            49,883,261Long-term
      debt, less current maturities
                                            
                                            
                                            18,969,934
                                            
                                            
                                            
                                            15,548,964Commitments
      and contingencies
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Stockholders'
      equity (deficit):Common
      stock, $.04 par value; 30,000,000 shares authorized,
                                              19,418,799
      shares issued and outstanding (2007—19,407,966)
                                            
                                            
                                            776,752
                                            
                                            
                                            
                                            776,319Capital
      in excess of par value
                                            
                                            
                                            61,980,333
                                            
                                            
                                            
                                            61,709,491Retained
      earnings (Accumulated deficit)
                                            
                                            
                                            (76,558,127
                                            )
                                            
                                            
                                            (48,557,613
                                            )Total
      stockholders' equity (deficit)
                                            
                                            
                                            (13,801,042
                                            )
                                            
                                            
                                            13,928,197Total
      liabilities and stockholders' equity (deficit)
                                            
                                            $
                                            69,156,791
                                            
                                            
                                            $
                                            79,360,422




See
accompanying notes to consolidated financial statements.




36




INNOVEX, INC.
AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS




For
      the Years Ended,September
      27,
                                                    2008
                                                  
                                                  September
      29,
                                                    2007
                                                  
                                                  September
      30,
                                                    2006Net
      sales
                                                  
                                                  $
                                                  71,039,009
                                                  
                                                  
                                                  $
                                                  87,844,120
                                                  
                                                  
                                                  $
                                                  173,144,366Costs
      and expenses:Cost
      of sales
                                                  
                                                  
                                                  80,112,836
                                                  
                                                  
                                                  
                                                  90,531,067
                                                  
                                                  
                                                  
                                                  154,352,811Selling,
      general and administrative
                                                  
                                                  
                                                  9,135,417
                                                  
                                                  
                                                  
                                                  11,694,057
                                                  
                                                  
                                                  
                                                  14,561,420Royalty
      expense to equity investee
                                                  
                                                  
                                                  127,876
                                                  
                                                  
                                                  
                                                  625,699
                                                  
                                                  
                                                  
                                                  1,432,716Engineering
                                                  
                                                  
                                                  2,471,550
                                                  
                                                  
                                                  
                                                  3,447,821
                                                  
                                                  
                                                  
                                                  5,144,156Restructuring
      and goodwill impairment charges
                                                  
                                                  
                                                  3,826,826
                                                  
                                                  
                                                  
                                                  9,857,179
                                                  
                                                  
                                                  
                                                  14,768,293Net
      (gain) loss on sale of assets
                                                  
                                                  
                                                  (124,976
                                                  )
                                                  
                                                  
                                                  1,266,195
                                                  
                                                  
                                                  
                                                  (2,890,314
                                                  )Interest
      expense
                                                  
                                                  
                                                  3,179,589
                                                  
                                                  
                                                  
                                                  2,564,764
                                                  
                                                  
                                                  
                                                  2,274,985Interest
      income
                                                  
                                                  
                                                  (125,186
                                                  )
                                                  
                                                  
                                                  (219,007
                                                  )
                                                  
                                                  
                                                  (127,759
                                                  )Other
      (income) expense, net
                                                  
                                                  
                                                  418,228
                                                  
                                                  
                                                  
                                                  212,267
                                                  
                                                  
                                                  
                                                  589,15199,022,160
                                                  
                                                  
                                                  
                                                  119,980,042
                                                  
                                                  
                                                  
                                                  190,105,459Loss
      before provision for income taxes
                                                  
                                                  
                                                  (27,983,151
                                                  )
                                                  
                                                  
                                                  (32,135,922
                                                  )
                                                  
                                                  
                                                  (16,961,093
                                                  )Benefit
      (provision) for income taxes
                                                  
                                                  
                                                  (17,363
                                                  )
                                                  
                                                  
                                                  (10,838
                                                  )
                                                  
                                                  
                                                  (8,916
                                                  )Net
      loss
                                                  
                                                  $
                                                  (28,000,514
                                                  )
                                                  
                                                  $
                                                  (32,146,760
                                                  )
                                                  
                                                  $
                                                  (16,970,009
                                                  )Net
      loss per share:Basic
                                                  
                                                  $
                                                  (1.44
                                                  )
                                                  
                                                  $
                                                  (1.66
                                                  )
                                                  
                                                  $
                                                  (0.88
                                                  )Diluted
                                                  
                                                  $
                                                  (1.44
                                                  )
                                                  
                                                  $
                                                  (1.66
                                                  )
                                                  
                                                  $
                                                  (0.88
                                                  )Weighted
      average shares outstanding:Basic
                                                  
                                                  
                                                  19,408,974
                                                  
                                                  
                                                  
                                                  19,389,169
                                                  
                                                  
                                                  
                                                  19,299,705Diluted
                                                  
                                                  
                                                  19,408,974
                                                  
                                                  
                                                  
                                                  19,389,169
                                                  
                                                  
                                                  
                                                  19,299,705




See
accompanying notes to consolidated financial statements.




37


INNOVEX, INC.
AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)




For
the Years Ended September 27, 2008, September 29, 2007 and September 30,
2006




Common
                                Stock
                              
                              Capital
      in
                                Excess
      of
                                Par
      Value
                              
                              Retained
                                Earnings
                                (Accumulated
                                Deficit)
                              
                              Total
                                Stockholders'
                                Equity
      (Deficit)Balance
      at October 2, 2005
                              
                              
                              768,854
                              
                              
                              
                              60,048,522
                              
                              
                              
                              559,156
                              
                              
                              
                              61,376,532Shares
      issued through exercise of stock options
                              
                              
                              5,489
                              
                              
                              
                              372,084
                              
                              
                              
                              —
                              
                              
                              
                              377,573Stock
      based compensation expense
                              
                              
                              —
                              
                              
                              
                              670,635
                              
                              
                              
                              —
                              
                              
                              
                              670,635Shares
      issued through employee stock purchase plan
                              
                              
                              879
                              
                              
                              
                              53,194
                              
                              
                              
                              —
                              
                              
                              
                              54,073Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (16,970,009
                              )
                              
                              
                              (16,970,009
                              )Balance
      at September 30, 2006
                              
                              
                              775,222
                              
                              
                              
                              61,144,435
                              
                              
                              
                              (16,410,853
                              )
                              
                              
                              45,508,804Shares
      issued through exercise of stock options
                              
                              
                              193
                              
                              
                              
                              2,525
                              
                              
                              
                              —
                              
                              
                              
                              2,718Stock
      based compensation expense
                              
                              
                              —
                              
                              
                              
                              529,397
                              
                              
                              
                              —
                              
                              
                              
                              529,397Shares
      issued through employee stock purchase plan
                              
                              
                              904
                              
                              
                              
                              33,134
                              
                              
                              
                              —
                              
                              
                              
                              34,038Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (32,146,760
                              )
                              
                              
                              (32,146,760
                              )Balance
      at September 29, 2007
                              
                              $
                              776,319
                              
                              
                              $
                              61,709,491
                              
                              
                              $
                              (48,557,613
                              )
                              
                              $
                              13,928,197Shares
      issued through vesting of restricted shares
                              
                              
                              133
                              
                              
                              
                              (133
                              )
                              
                              
                              —
                              
                              
                              
                              —Stock
      based compensation expense
                              
                              
                              —
                              
                              
                              
                              268,632
                              
                              
                              
                              —
                              
                              
                              
                              268,632Shares
      issued through employee stock purchase plan
                              
                              
                              300
                              
                              
                              
                              2,343
                              
                              
                              
                              —
                              
                              
                              
                              2,643Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (28,000,514
                              )
                              
                              
                              (28,000,514
                              )Balance
      at September 27, 2008
                              
                              $
                              776,752
                              
                              
                              $
                              61,980,333
                              
                              
                              $
                              (76,558,127
                              )
                              
                              $
                              (13,801,042
                              )




See accompanying notes to consolidated
financial statements.






38






INNOVEX, INC.
AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS




For
      the Years Ended
 September
      27,
                                                      2008
                                                    
                                                    
                                                    September
      29,
                                                      2007
                                                    
                                                    
                                                    September
      30,
                                                      2006Cash
      Flows From Operating Activities:Net
      income (loss)
                                                    
                                                    $
                                                    (28,000,514
                                                    )
                                                    
                                                    $
                                                    (32,146,760
                                                    )
                                                    
                                                    $
                                                    (16,970,009
                                                    )Adjustments
      to reconcile net income (loss) to net
                                                      cash
      provided by (used in) operating activities:Depreciation
      and amortization
                                                    
                                                    
                                                    7,729,116
                                                    
                                                    
                                                    
                                                    8,259,393
                                                    
                                                    
                                                    
                                                    10,321,059Asset
      impairment changes
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    4,159,296
                                                    
                                                    
                                                    
                                                    11,183,087Stock
      based compensation
                                                    
                                                    
                                                    268,632
                                                    
                                                    
                                                    
                                                    529,397
                                                    
                                                    
                                                    
                                                    670,634Other
      non-cash items
                                                    
                                                    
                                                    (70,974
                                                    )
                                                    
                                                    
                                                    1,266,195
                                                    
                                                    
                                                    
                                                    (3,312,583
                                                    )Changes
      in operating assets and liabilities:Accounts
      receivable, net
                                                    
                                                    
                                                    (602,782
                                                    )
                                                    
                                                    
                                                    408,928
                                                    
                                                    
                                                    
                                                    18,434,102Inventories
                                                    
                                                    
                                                    1,056,063
                                                    
                                                    
                                                    
                                                    954,206
                                                    
                                                    
                                                    
                                                    5,279,291Income
      taxes
                                                    
                                                    
                                                    4,050
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —Other
      current assets
                                                    
                                                    
                                                    584,158
                                                    
                                                    
                                                    
                                                    84,727
                                                    
                                                    
                                                    
                                                    (1,231,299
                                                    )Other
      long-term assets
                                                    
                                                    
                                                    727,193
                                                    
                                                    
                                                    
                                                    301,092
                                                    
                                                    
                                                    
                                                    2,676,852Accounts
      payable
                                                    
                                                    
                                                    8,441,143
                                                    
                                                    
                                                    
                                                    (859,369
                                                    )
                                                    
                                                    
                                                    (7,254,612
                                                    )Other
      current and long-term liabilities
                                                    
                                                    
                                                    939,754
                                                    
                                                    
                                                    
                                                    (553,963
                                                    )
                                                    
                                                    
                                                    (1,661,097
                                                    )Net
      cash provided (used in) operating activities
                                                    
                                                    
                                                    (8,924,161
                                                    )
                                                    
                                                    
                                                    (17,596,858
                                                    )
                                                    
                                                    
                                                    18,135,425Cash
      Flows From Investing Activities:Capital
      expenditures
                                                    
                                                    
                                                    (3,267,133
                                                    )
                                                    
                                                    
                                                    (4,738,287
                                                    )
                                                    
                                                    
                                                    (8,124,748
                                                    )Proceeds
      from sale of assets
                                                    
                                                    
                                                    125,775
                                                    
                                                    
                                                    
                                                    4,746,037
                                                    
                                                    
                                                    
                                                    5,337,954Net
      cash provided by (used in) investing activities
                                                    
                                                    
                                                    (3,141,358
                                                    )
                                                    
                                                    
                                                    7,750
                                                    
                                                    
                                                    
                                                    (2,786,794
                                                    )Cash
      Flows From Financing Activities:Principal
      payments on long-term debt
                                                    
                                                    
                                                    (6,035,438
                                                    )
                                                    
                                                    
                                                    (13,734,851
                                                    )
                                                    
                                                    
                                                    (7,807,809
                                                    )Net
      (payments) proceeds on line of credit
                                                    
                                                    
                                                    12,231,058
                                                    
                                                    
                                                    
                                                    20,433,958
                                                    
                                                    
                                                    
                                                    (13,881,178
                                                    )Issuance
      of long-term debt
                                                    
                                                    
                                                    1,945,041
                                                    
                                                    
                                                    
                                                    11,488,003
                                                    
                                                    
                                                    
                                                    2,813,645Proceeds
      from exercise of stock options
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    2,718
                                                    
                                                    
                                                    
                                                    377,573Proceeds
      from employee stock purchase plans
                                                    
                                                    
                                                    2,643
                                                    
                                                    
                                                    
                                                    34,038
                                                    
                                                    
                                                    
                                                    54,073Net
      cash provided by (used in) financing activities
                                                    
                                                    
                                                    8,143,304
                                                    
                                                    
                                                    
                                                    18,223,866
                                                    
                                                    
                                                    
                                                    (18,443,696
                                                    )Increase
      (decrease) in cash and equivalents
                                                    
                                                    
                                                    (3,922,215
                                                    )
                                                    
                                                    
                                                    634,758
                                                    
                                                    
                                                    
                                                    (3,095,065
                                                    )Cash
      and equivalents at beginning of year
                                                    
                                                    
                                                    10,453,803
                                                    
                                                    
                                                    
                                                    9,819,045
                                                    
                                                    
                                                    
                                                    12,914,110Cash
      and equivalents at end of year
                                                    
                                                    $
                                                    6,531,588
                                                    
                                                    
                                                    $
                                                    10,453,803
                                                    
                                                    
                                                    $
                                                    9,819,045




Supplemental
Disclosures:




Cash paid
for interest was approximately $2,991,000; $2,661,000; and $2,306,000 in 2008,
2007 and 2006.




Income tax
payments were approximately $13,000; $11,000; and $20,000 in 2008, 2007 and
2006.




See accompanying notes to consolidated
financial statements.




39




INNOVEX, INC.
AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




September
27, 2008, September 29, 2007 and September 30, 2006






Note A.—Summary
of Significant Accounting Policies






Innovex, Inc.
and Subsidiaries (the "Company") is a diversified manufacturer of electrical
components for the computer, data storage, consumer, medical, telecommunications
and other electronic industries. Substantially all of the Company's revenues,
operating profits and assets relate to one operating segment involved in the
manufacture of flexible circuit interconnects. Company customers are located
throughout the United States, Europe and the Pacific Rim. The Company has
manufacturing facilities in Lamphun, Thailand.  The Company operates
in one business segment.






A
summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements
follows:






Principles
of Consolidation and Fiscal Year—The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions have been eliminated in consolidation.




The
Company utilizes a fiscal year that ends on the Saturday nearest to September 30
which results in a 52 or 53 week year rather than a twelve-month fiscal year.
The Company’s actual fiscal quarters end on the Saturday closest to the end of
the calendar quarter.  Fiscal years ended September 27, 2008,
September 29, 2007 and September 30, 2006 included 52 weeks of
operations.




Foreign
Currency Translation—The Company uses the United States dollar as its
functional currency for its subsidiary in Thailand. Re-measurement gains and
losses, resulting from the process of re-measuring the foreign currency
denominated assets and liabilities of these foreign subsidiaries into U.S.
dollars, are included in operations.




Foreign
Exchange Instruments—The Company enters into short-term forward foreign
currency exchange contracts in the regular course of business to manage its
exposure against foreign currency fluctuations, primarily relating to
nonfunctional currency monetary assets and liabilities. The forward exchange
contracts generally require the Company to exchange Thailand baht for U.S.
dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to at the
inception of the contracts. The contracts are not designated as hedges,
therefore, the gains and losses on foreign currency exchange contracts are
included in other income (expense). The Company does not enter into forward
exchange contracts for trading purposes.  The Company carries these
contracts on the balance sheet at fair value, determined by reference to quoted
market prices.




Cash
and Cash Equivalents—The Company considers all highly liquid temporary
investments with an original maturity of three months or less to be cash
equivalents. The Company had no cash equivalents at September 27 2008 and
September 29, 2007.  Cash of approximately $636,000 and
$8.3 million was on deposit in foreign financial institutions at
September 27, 2008 and September 29, 2007 respectively. The Company
maintains cash balances at several financial institutions, and at times, such
balances exceed insured limits.  The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash.




Accounts
Receivable—The Company grants credit to customers in the normal course of
business and generally does not require collateral or any other security to
support amounts due. Management performs ongoing credit evaluations of
customers. The Company maintains allowances for potential credit
losses.




Inventories—Inventories
which are composed of raw materials, work-in-progress and finished goods are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method.




Property,
Plant and Equipment—Depreciation is provided using the straight-line
method over the estimated useful lives of the assets for financial reporting and
accelerated methods for tax purposes. Estimated service lives range from 5 to
30 years for buildings and leasehold improvements, from 2 to 7 years
for machinery and equipment and from 3 to 7 years for office furniture and
fixtures.




40




Goodwill—Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. Goodwill and any other intangible assets determined to have
indefinite useful lives are not amortized. The Company has determined goodwill
relates to one reporting unit for purposes of impairment testing. Goodwill and
other intangible assets with indefinite lives are tested for impairment annually
or whenever an impairment indicator arises.  The Company’s goodwill
was considered impaired and written down to a value of $-0- as of September 29,
2007.




Fair
Values of Financial Instruments—Due to their short-term nature, the
carrying value of current financial assets and liabilities approximates their
fair values. The fair value of borrowings, if recalculated based on current
interest rates, would not significantly differ from the recorded
amounts.




Net
Income (Loss) Per Share—The Company's basic net income (loss) per share
is computed by dividing net income (loss) by the weighted average number of
outstanding common shares. The Company's diluted net income (loss) per share is
computed by dividing net income (loss) by the weighted average number of
outstanding common shares and common share equivalents related to stock options,
when dilutive. Options to purchase 1,521,315, 1,976,815 and 1,416,536 shares of
common stock were outstanding during 2008, 2007 and 2006, but were excluded from
the computation of common share equivalents because they were
antidilutive.




Revenue
Recognition— The Company makes electronic components (flexible circuits)
based on customer specifications.  The Company’s revenue recognition
policy is consistently applied regardless of sales channels utilized and product
destination. In recognizing revenue in any period, the company applies the
provisions of SEC Staff Accounting Bulletin 104, "Revenue Recognition." Revenue
from product sales is recognized when persuasive evidence of an arrangement
exists, the product has been delivered, the fee is fixed and determinable and
collection of the resulting receivable is reasonably assured.





For all
sales, a binding purchase order is used as evidence of an
arrangement.  The Company also stores inventory in warehouses (JIT
hubs – third party owned warehouses) that are located close to the customer's
manufacturing facilities.  Revenue is recognized on sales from JIT
hubs upon the transfer of title and risk of loss, following the customer's
acknowledgement of the receipt of the goods..




Use
of Estimates—Preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and related revenues and
expenses and disclosure about contingent assets and liabilities at the date of
the financial statements. Actual results could differ from these
estimates.




Income
Taxes—The Company records income taxes in accordance with the liability
method of accounting. Deferred taxes are recognized for the estimated taxes
ultimately payable or recoverable based on enacted tax law. The Company
establishes a valuation allowance to reduce the deferred tax asset to an amount
that is more likely than not to be realizable. Changes in enacted tax rates are
reflected in the tax provision as they occur. The Company adopted Financial
Accounting Standards Board Interpretation No. 48 in Fiscal 2008 and it did not
have an impact on the financial statements.




Comprehensive
Income—Comprehensive income equaled net income for the fiscal year ended
September 27, 2008, September 29, 2007 and September 30, 2006.




Stock Based
Compensation—Statement of Financial Accounting Standard  No.
123R, “Share Based Payment” (“SFAS 123R”), requires all share-based payments,
including grants of stock options, to be recognized in the income statement as
an operating expense, based on their fair values over the requisite service
period.  The Company recorded $269,000, $529,000 and $671,000 of
related compensation expense in fiscal years 2008, 2007 and
2006.  This expense is included in selling, general and administrative
expense.  There was no tax benefit from recording this non-cash
expense.  The compensation expense increased both basic and diluted
net loss per share by $0.01, $0.03 and $0.03 for fiscal years 2008, 2007 and
2006, respectively.




The
Company uses the Black-Scholes option pricing model to determine the weighted
average fair value of options. The weighted average fair value of options
granted in 2008, 2007 and 2006 were $0.34, $0.85 and $1.17, respectively. The total intrinsic value
of options exercised during the years endedSeptember 27, 2008,September29, 2007andSeptember 30,
2006,was
$2,000;$6,000,and $366,000,respectively.The assumptions utilized to determine the fair value
of options at the date of grant are indicated in the following table. No
adjustment was made to the Black Scholes calculation to reflect that the options
are not freely traded. Expected volatilities are based on implied volatilities
from traded options on the Company’s stock, historical volatility of the
Company’s stock, and other factors.  The Company uses historical data to
estimate option exercise and employee termination within the valuation model;
separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes.  The expected term of options
granted is derived from the output of the option valuation model and represents
the period of time that options granted are expected to be outstanding; the
range given below results from certain groups of employees exhibiting different
behavior.  The risk-free rate for periods within the contractual life of
the option is based on the U.S. Treasury yield curve in effect at the time of
grant.  The Company uses its actual forfeiture rate.




41





2008
                    
                    2007
                    
                    2006Risk-free
      interest rate
                    2.6%
                    
                    4.5%
                    
                    4.3%Expected
      volatility
                    104%
                    
                    50%
                    
                    48%Expected
      life (in years)
                    2.9
                    
                    3.0
                    
                    3.0Dividend
      yield
                    —
                    
                    —
                    
                    —





New Pronouncements— In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or
SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS No. 141(R) is effective
for fiscal years beginning after December 15, 2008. The adoption of SFAS
No. 141(R) would change the Company’s accounting treatment for business
combinations on a prospective basis beginning in the period it is
adopted.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities--an amendment of FASB Statement No. 133" ("FAS 161"). FAS
161 changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in FAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company
does not expect the provisions of FASB 161 to have a material impact on the
Company's consolidated financial statements.





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurement(SFAS
157). This standard clarifies the principle that fair value should be based on
the assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company does not expect the implementation of SFAS 157 will have a material
impact on its results of operations or financial condition.  The FASB
approved the issuance of FASB Staff Position of 157-2, which defers the
effective date of SFAS 157 until Fiscal Years beginning after November 15, 2008
for non-financial assets and non-financial liabilities.





The
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 159, Fair Value Option for Financial
Assets and Financial Liabilities(SFAS 159). This standard addresses
earnings volatility caused by existing accounting standards that require related
financial assets and liabilities to be measured using different measurement
attributes (such as historical cost and fair value). SFAS 159 is intended to
improve financial reporting by giving all entities the option to recognize most
financial assets and liabilities and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected should be reported in earnings. SFAS 159 is effective for the first
quarter of our fiscal 2009 beginning October 1, 2008. We do not expect SFAS 159
to have a material effect on our financial condition or results of
operations.




42





Note B.—Inventories






Inventories
are comprised of the following in thousands:




September
      27,
                                                  2008
                                                
                                                September
      29,
                                                  2007Raw
      materials and purchased parts
                                                
                                                $
                                                5,569
                                                
                                                
                                                $
                                                4,549Work-in-process
      and finished goods
                                                
                                                
                                                4,430
                                                
                                                
                                                
                                                6,506$
                                                9,999
                                                
                                                
                                                $
                                                11,055




Note C.—Line
of Credit and Long-Term Debt




In
December 2006, the Company entered into a new credit facility with Bank of
Ayudhya Public Company Limited (BAY) and TMB Bank Public Company Limited (TMB)
which expanded its existing credit facilities with these banks. The new Third
Credit Facilities Agreement provided for an additional 600 million baht facility
to be used for procurement of equipment within 24 months from the December 19,
2006 effective date.  The Company drew down approximately $9.5 million
under this new credit facility during fiscal 2007 and $1.6 million in the fiscal
2008 first and second quarters.  In June 2004, the Company entered
into the Second Credit Facilities Agreement with BAY and TMB which expanded the
existing credit facility with these banks.  The Second Credit
Facilities Agreement was comprised of a 660 million baht long-term facility, a
400 million baht long-term facility, packing credit facilities totaling 1,100
million baht, short-term working capital facilities totaling 90 million baht and
a 10 million baht overdraft facility. The Thailand credit facilities are secured
by certain receivables, inventory and assets held by the Company in Thailand
with a book value of $52.5 million at September 27, 2008.   As of
September 27, 2008, the Company had approximately $21.9 million outstanding
under its long-term Thailand credit facilities and a $32.7 million outstanding
balance under the short-term Thailand credit facilities. Total unused
availability as of September 27, 2008 was approximately $2.5 million under the
short-term packing credit and working capital facilities. Utilization of the
packing credit facility availability is dependent on presenting qualifying
customer purchase orders to the banks for draw down.




In June
2008, the Company completed the restructuring of its long-term debt facility
with the Thai lenders.  As part of the restructuring, the debt
repayment schedules were modified resulting in a $6.0 million reduction in
repayments required to be made in the remainder of the fiscal 2008 and a $9.0
million reduction in payments required to be made in fiscal 2009.  In
addition, the undrawn portion available under the Third Credit Facilities
Agreement of 600 million baht was cancelled as part of the bank
restructuring.  No gain or loss was recorded as a result of the
restructuring because it was determined by the Company to be a modification
under EITF-96-19.




Under the
terms of the Thailand based credit facilities, any outstanding balance on the
400 and 660 million baht term loans had an interest rate of 6.5% at September
27, 2008.  The 400 and 660 million baht facilities bore interest at
the one year fixed deposit rate plus 3% until June 2007 when they began bearing
interest at the one year fixed deposit rate plus 3.5%.  The 600
million baht term loan had an interest rate of 6.5% at September 27, 2008. The
600 million baht loan bears an interest rate of 1% less than the BAY minimum
loan rate (MLR) until December 2008 at which time the rate will be calculated as
the MLR less 0.5%.  The packing credit bears interest at the BAY MLR
less 1.75%, which was 5.75% for the tranches outstanding at September 27,
2008.  Funds are available under the packing credit facility on a
revolving basis.   Amounts are drawn on the packing credit
facility upon presentation of an open customer purchase order.  The
amounts drawn on the packing credit facility mature within 180 days of the draw
date. The working capital and overdraft facilities bear interest at the TMB and
BAY minimum overdraft rate (“MOR”), 8.0% at September 27, 2008.  The
Company is required to maintain certain financial ratios and meet certain net
worth levels.  The Company was in compliance with all covenants as of
September 27, 2008.  As of September 29, 2007, the 400 and 660 million
baht term loans had interest rates of 5.7813% and 5.8125%, respectively and the
600 million baht facility had an interest rate of 6.1225%.




In January
2005, the Company entered into a financing agreement with US Federal Credit
Union under which the Company borrowed $4.0 million. An additional $3.1million
was borrowed under that agreement on April 15, 2005 for a total of $7.1 million.
In addition to normally scheduled payments, a principal payment of $1.5 million
was made on June 27, 2006 related to sale of the business, facility and assets
of the Company’s etched metal components business. An additional principal
payment of $4 million was made on May 18, 2007 related to the sale of the Maple
Plain facility.  As of September 27, 2008, $568,000 was outstanding
under the US Federal credit facility. While the note is due February 1, 2010
with principal amounts under the arrangement bearing interest at a rate of 7%
per annum, the final payment will be made during the fourth quarter of fiscal
2009 as a result of the prepayments. Payments under the underlying note are
calculated using a 25 year amortization with the remaining principal amount due
at maturity. The note is secured by the Litchfield facilities and any proceeds
from the sale of those facilities will be used to pay down the outstanding note
balance.


Long-term
obligations consist of the following:




43





(in
      thousands of U.S dollar equivalents)
                                  September
      27,
                                    2008
                                  
                                  September
      29,
                                    2007Thailand
      BAY and TMB facilities:400
      million baht term loan
                                  
                                  $
                                  4,711
                                  
                                  
                                  $
                                  6,712660
      million baht term loan
                                  
                                  
                                  6,184
                                  
                                  
                                  
                                  9,339600
      million baht term loan
                                  
                                  
                                  11,045
                                  
                                  
                                  
                                  9,467U.S.
      based facilities:US
      Federal Credit Union
                                  
                                  
                                  568
                                  
                                  
                                  
                                  1,08022,508
                                  
                                  
                                  
                                  26,598Less
      current portion
                                  
                                  
                                  3,538
                                  
                                  
                                  
                                  11,049$
                                  18,970
                                  
                                  
                                  $
                                  15,549




At
September 27, 2008, the outstanding balance was $30.0 million under the packing
credit facility and $2.7 million under the working capital line while there was
no outstanding balance under the overdraft facility.  At September 29,
2007, the outstanding balance was $20.4 million under the packing credit
facility while there were no outstanding balances under the working capital and
overdraft facilities.




Aggregate
maturities of long-term debt including capitalized leases for the next five
years are as follows (in thousands): 2009—$3,538; 2010—$4,700; 2011—$6,467;
2012—$7,803; and none thereafter.  The recorded value of long-term
debt approximates fair market value.




Note D.—Stockholders'
Equity




Stock
Option Plans—




The
Company has stock option plans that provide for incentive and non-qualified
stock options to be granted to directors, officers and other key employees or
consultants. The stock options granted generally have a ten-year life, vest over
a period of six months to five years, and have an exercise price equal to the
fair market value of the stock on the date of grant. New shares are issued under
existing registration statements upon exercise.  At September 27,
2008, the Company had 1,176,193 shares of common stock available for issuance
under the plans.




Restricted
Stock Plan—




The
Company also has a restricted stock plan that provides for grants of common
stock to key employees of the Company other than the Chief Executive Officer and
the four highest paid executives of the Company other than the Chief Executive
Officer. The common stock grants generally vest over three to five years. At
September 27, 2008, the Company had 33,883 shares of common stock available
for issue under the plan.






44





Transactions
under the stock option and restricted stock plans during each of the three years
in the period ending September 27, 2008 are summarized as
follows:




Number
      of
                                  Shares
      Under
                                  Option
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  PriceBalance
      at October 2, 2005
                                
                                
                                2,097,158
                                
                                
                                
                                6.99Granted
                                
                                
                                574,850
                                
                                
                                
                                3.11Forfeited
                                
                                
                                (399,456
                                )
                                
                                
                                5.88Exercised
                                
                                
                                (136,575
                                )
                                
                                
                                2.66Balance
      at September 30, 2006
                                
                                
                                2,135,977
                                
                                
                                
                                6.43Granted
                                
                                
                                474,250
                                
                                
                                
                                2.33Forfeited
                                
                                
                                (627,445
                                )
                                
                                
                                7.09Exercised
                                
                                
                                (4,814
                                )
                                
                                
                                0.56Balance
      at September 29, 2007
                                
                                
                                1,977,968
                                
                                
                                
                                5.25Granted
                                
                                
                                1,194,125
                                
                                
                                
                                0.50Forfeited
                                
                                
                                (1,530,585
                                )
                                
                                
                                4.72Exercised
                                
                                
                                (3,333
                                )
                                
                                
                                —Balance
      at September 27, 2008
                                
                                
                                1,638,175
                                
                                
                                
                                2.29




Options
exercisable at:




Number
                      Exercisable
                    
                    
                    Weighted
                      Average
                      Exercise
      PriceSeptember
      30, 2006
                    
                    
                    1,064,527
                    
                    
                    $
                    8.48September
      29, 2007
                    
                    
                    1,061,211
                    
                    
                    
                    6.70September
      27, 2008
                    
                    
                    520,495
                    
                    
                    
                    4.98




The
following table summarizes information concerning currently outstanding and
exercisable stock options:




Options
      Outstanding
                                                                                                                            
                                                                                                                            Options
      ExercisableRange
      of
                                                                                                                              Exercise
                                                                                                                              Prices
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            Number
                                                                                                                              Outstanding
                                                                                                                            
                                                                                                                            Weighted
                                                                                                                              Average
                                                                                                                              Remaining
                                                                                                                              Contractual
                                                                                                                              Life
                                                                                                                            
                                                                                                                            
                                                                                                                            Weighted
                                                                                                                              Average
                                                                                                                              Exercise
                                                                                                                              Price
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            Aggregate
      Intrinsic Value
                                                                                                                            
                                                                                                                            Number
                                                                                                                              Exercisable
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            Weighted
                                                                                                                              Average
                                                                                                                              Exercise
                                                                                                                              Price
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            Aggregate
                                                                                                                              Intrinsic
                                                                                                                              Value$0.00
      - $0.92
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            971,750
                                                                                                                            
                                                                                                                            9.4
      years
                                                                                                                            
                                                                                                                            $
                                                                                                                            0.42
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            412,119
                                                                                                                            
                                                                                                                            70,000
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            0.53
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            36,7991.43
      - 2.42
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            221,745
                                                                                                                            
                                                                                                                            7.0
      years
                                                                                                                            
                                                                                                                            
                                                                                                                            2.22
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            491,919
                                                                                                                            
                                                                                                                            128,545
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2.08
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            267,7852.70
      - 4.85
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            231,030
                                                                                                                            
                                                                                                                            6.4
      years
                                                                                                                            
                                                                                                                            
                                                                                                                            3.75
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            865,877
                                                                                                                            
                                                                                                                            128,750
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            3.83
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            493,0485.28
      - 7.82
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            61,650
                                                                                                                            
                                                                                                                            4.1
      years
                                                                                                                            
                                                                                                                            
                                                                                                                            6.52
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            401,970
                                                                                                                            
                                                                                                                            59,650
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            6.50
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            387,6598.89
      - 9.81
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            98,450
                                                                                                                            
                                                                                                                            5.2
      years
                                                                                                                            
                                                                                                                            
                                                                                                                            9.34
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            919,572
                                                                                                                            
                                                                                                                            80,000
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            9.35
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            747,80011.79
      -13.09
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            53,550
                                                                                                                            
                                                                                                                            1.4
      years
                                                                                                                            
                                                                                                                            
                                                                                                                            12.32
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            659,666
                                                                                                                            
                                                                                                                            53,550
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            12.32
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            659,6661,638,175
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,751,123
                                                                                                                            
                                                                                                                            520,495
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            2,592,757







45




A summary
of the status of the Company’s nonvested shares as of September 27, 2008, and
changes during the year ended September 27, 2008, is presented
below:




Nonvested
      Shares
                                  
                                  Shares
                                  
                                  Weighted
                                    Average
      Grant
                                    Date
      Fair ValueNonvested
      at September 30, 2007
                                  
                                  
                                  916,757
                                  
                                  
                                  $
                                  1.37Granted
                                  
                                  
                                  1,194,125
                                  
                                  
                                  
                                  0.34Vested
                                  
                                  
                                  (334,448
                                  )
                                  
                                  
                                  0.80Forfeited
                                  
                                  
                                  (658,754
                                  )
                                  
                                  
                                  0.98Nonvested
      at September 27, 2008
                                  
                                  
                                  1,117,680
                                  
                                  
                                  $
                                  0.51




As of
September 27, 2008, there was $355,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plans.  That cost is expected to be recognized over a weighted-average
period of 1.2 years.  The total fair value of shares vested during the
years ended September 27, 2008, September 29, 2007, and September 30, 2006, was
$269,000, $529,000, and $653,000, respectively.




Employee
Stock Purchase Plan—




The
Company had an Employee Stock Purchase Plan (ESPP) which was available to
eligible employees. Under terms of the plan, eligible employees designated from
1% to 10% of their compensation to be withheld through payroll deductions for
the purchase of common stock at 85% of the lower of the market price on the
first or last day of the offering period. The plan was terminated at March 30,
2008. Fair value disclosures under SFAS No. 123 have not been disclosed for
shares under the ESPP as such values are immaterial.




Note E.—Income
Taxes




The
effective income tax rates differed from the federal statutory income tax rate
as follows for the years ended:




September
      27,
                            2008
                          
                          
                          September
      29,
                            2007
                          
                          
                          September
      30,
                            2006Federal
      statutory rate
                          
                          
                          (34.0
                          )%
                          
                          
                          (34.0
                          )%
                          
                          
                          (34.0
                          )%State
      income taxes
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Foreign
      operating income benefit
                          
                          
                          (5.7
                          )
                          
                          
                          3.5
                          
                          
                          
                          (7.3
                          )Change
      in valuation allowance
                          
                          
                          43.4
                          
                          
                          
                          29.9
                          
                          
                          
                          40.6Adjustments
      to income tax provision accruals
                          
                          
                          (4.0
                          )
                          
                          
                          —
                          
                          
                          
                          —Permanent
      differences
                          
                          
                          0.3
                          
                          
                          
                          0.6
                          
                          
                          
                          0.8—
                          %
                          
                          
                          —
                          %
                          
                          
                          0.1
                          %









46




Components
of the (benefit) provision for income taxes are as follows for the years ended
(thousands of dollars):




September
      27,
                                                2008
                                              
                                              
                                              September
      29,
                                                2007
                                              
                                              
                                              September
      30,
                                                2006Current:Federal
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —Foreign
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —State
                                              
                                              
                                              17
                                              
                                              
                                              
                                              11
                                              
                                              
                                              
                                              917
                                              
                                              
                                              
                                              11
                                              
                                              
                                              
                                              9Deferred
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —$
                                              17
                                              
                                              
                                              $
                                              11
                                              
                                              
                                              $
                                              9




Deferred
taxes recognize the impact of temporary differences between the amounts of
assets and liabilities recorded for financial statement purposes and such
amounts measured in accordance with tax laws. Realization of net operating loss
carryforwards and other deferred tax temporary differences are contingent on
future taxable earnings. The Company's deferred tax asset was reviewed for
expected utilization using a "more likely than not" approach by assessing the
available positive and negative evidence surrounding its recoverability. As a
result of the Company’s net operating loss position, the Company’s valuation
allowance changed by $13,094,000 and $10,381,000 for the period ended September
27, 2008 and September 29, 2007, respectively.  The Company continues
to assess and evaluate strategies that will enable the deferred tax asset, or
portion thereof, to be utilized, and will reduce the valuation allowance
appropriately at such time when it is determined that the "more likely than not"
approach is satisfied. The net operating loss of $181,260,000 and tax credit
carry-forwards of $1,786,000 expire at various dates from September 2018 through
September 2028.




The
cumulative temporary differences between the tax bases of assets and liabilities
and their carrying amounts for financial statement purposes are as follows at
(thousands of dollars):




September
      27,
                                    2008
                                  
                                  September
      29,
                                    2007Current
      deferred tax assets:Inventories
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  35Receivables
                                  
                                  
                                  57
                                  
                                  
                                  
                                  53Other
      current assets
                                  
                                  
                                  118
                                  
                                  
                                  
                                  (55
                                  )Compensation
      and benefits
                                  
                                  
                                  8
                                  
                                  
                                  
                                  41Restructuring
                                  
                                  
                                  119
                                  
                                  
                                  
                                  225Other
      accruals
                                  
                                  
                                  262
                                  
                                  
                                  
                                  105Valuation
      allowances
                                  
                                  
                                  (564
                                  )
                                  
                                  
                                  (404
                                  )$
                                  —
                                  
                                  
                                  $
                                  —Long-term
      deferred tax assets (liabilities)—net:Accelerated
      depreciation
                                  
                                  $
                                  263
                                  
                                  
                                  $
                                  345Intangibles
                                  
                                  
                                  2,176
                                  
                                  
                                  
                                  3,016Tax
      credit and NOL carryforwards
                                  
                                  
                                  72,268
                                  
                                  
                                  
                                  58,412Valuation
      allowances
                                  
                                  
                                  (74,707
                                  )
                                  
                                  
                                  (61,773
                                  )$
                                  —
                                  
                                  
                                  $
                                  —




Note F.—Derivative
Instruments – Foreign Currency Transactions




The
Company enters into forward exchange contracts that are recorded at fair value,
with related fair value gains or losses recorded in income within the caption
net other (income) expense.  Generally, these contracts have
maturities of six months or less.  These contracts are entered into to
offset the gains or losses on foreign currency denominated assets and
liabilities.  The Company does not enter into forward exchange
contracts for trading purposes and the contracts are not designated as
hedges.  At September 27, 2008, the Company had an open forward
exchange contract to buy Thailand baht maturing December 4, 2008 with a notional
amount of 230 million baht which equates to approximately $6.8
million.




47





Foreign
currency transaction gains or (losses) included in net other (income) expense
(in thousands):





(in
      thousands)
                                              September
      27,
                                                2008
                                              
                                              September
      29,
                                                2007
                                              
                                              September
      30,
                                                2006Gain
      or (loss) from forward exchange contracts
                                              
                                              $
                                              (97
                                              )
                                              
                                              $
                                              2,775
                                              
                                              
                                              $
                                              1,998Other
      foreign currency gain or (loss)
                                              
                                              
                                              (459
                                              )
                                              
                                              
                                              (3,024
                                              )
                                              
                                              
                                              (2,594
                                              )Net
      gain or (loss) from foreign currency transactions
                                              
                                              $
                                              (556
                                              )
                                              
                                              $
                                              (249
                                              )
                                              
                                              $
                                              (596
                                              )




Note G.—Retirement
and Profit-Sharing Plans




The
Company sponsors a 401(k) retirement plan for all of its U.S. employees meeting
minimum eligibility requirements. The plan provides Company matching
contributions of 50% of each dollar of employee elective deferral contributions,
up to 3% of the employee’s compensation.  Company contributions for
this plan were approximately $92,000, $210,000 and $299,000 for the years ended
September 27, 2008, September 29, 2007 and September 30,
2006.




Note H.—Research
and Development Costs




The
Company incurred research and development costs of approximately $1,755,000,
$3,401,000 and $4,538,000 for the years ended September 27, 2008,
September 29, 2007 and September 30, 2006.




Note I.—Foreign
Operations and Significant Customers




The
Company continues to increase the functions performed in its Asian operation
located in Lamphun, Thailand in order to take advantage of the proximity to
customers and favorable labor and operating costs.  The Company had
aggregate sales outside of the US of $68,645,000; $84,328,000 and $164,089,000
for the years ending September 27, 2008; September 29, 2007 and
September 30, 2006, principally to Pacific Rim customers. With respect to
foreign operations for the years ended September 27, 2008 and September 29,
2007, long-lived assets of $39,609,000 and $44,324,000 were located in
Thailand.




International
net sales concentrations for fiscal years in excess of 10% were:




2008
                        
                        2007
                        
                        2006Republic
      of China
                        
                        39
                        %
                        25
                        %
                        26
                        %Thailand
                        
                        23
                        
                        54
                        
                        62Singapore
                        
                        14
                        
                        16
                        
                        6Taiwan
                        
                        13
                        
                        —
                        
                        —




Revenues
from three customers made up a significant portion of the Company's total net
sales during the years ending:




September
      27,
                                2008
                              
                              
                              September
      29,
                                2007
                              
                              
                              September
      30,
                                2006TPO
                              
                              
                              43
                              %
                              
                              
                              11
                              %
                              
                              
                              14
                              %Seagate
                              
                              
                              23
                              
                              
                              
                              66
                              
                              
                              
                              73Hitachi
      Global Storage
                              
                              
                              22
                              
                              
                              
                              17
                              
                              
                              
                              6




Seagate
acquired Maxtor in May 2006.  Maxtor activity has been combined with
Seagate activity for prior year presentation purposes.  Philip’s
Mobile Display Systems business unit was merged with Toppoly Optoelectronics
Corporation of Taiwan to create a new company called TPO in November
2005.




48




Accounts receivable from the above
three customers are 75% and 93% of the Company's accounts receivable at
September 27, 2008 and September 29, 2007.




Note J.—Commitments
and Contingencies




The
Company paid rent of $562,000, $1,431,000 and $1,664,000 in fiscal 2008, 2007
and 2006 under facility and equipment operating leases that expire at various
dates through December 2012.  As of September 27, 2008, the
future minimum lease commitments under the operating leases are payable as
follows (in thousands): 2009—$348; 2010—$351; 2011—$289; 2012—$100; 2013—$103;
and beyond— $26. The operating lease commitments relate to the Eastlake, Ohio
facility and the Plymouth, Minnesota office lease.  The Company is no
longer using the Eastlake facility and is attempting to sublease the
facility.




The
nature of the Company's business exposes the Company to potential environmental
remediation liabilities arising from the manufacture, use and disposal of
hazardous materials used to manufacture flex interconnect products. Management
believes that any cost associated with maintaining the Company's compliance with
current environmental remediation laws will not have a material adverse effect
on the Company's financial statements.




Purchases
from Hutchinson Technology Inc. comprised 6%, 32% and 38% of total purchases for
the years ended September 27, 2008, September 29, 2007 and September 30, 2006,
respectively.  Hutchinson Technology Inc. was the sole provider of
suspension components for our FSA product which reached its end of life in the
fiscal 2008 second quarter.




Note K.—Related
Party Transactions




Prior to
March 7, 2006, the Company held 35% of the outstanding shares of Applied
Kinetics Inc. (AKI).  AKI is a technology development company that
focuses on manufacturing processes related to disk drive
components.  AKI developed the manufacturing process technology
utilized by the Company’s FSA products.  AKI granted the Company a
license to use this technology in return for a royalty to be paid on the revenue
generated from the sale of these products. On March 7, 2006, the Company entered
into a Settlement Agreement with AKI pursuant to which, the parties dismissed
with prejudice their lawsuits against one another in exchange for redemption by
AKI of the 3,500 shares of AKI common stock owned by the Company and settlement
of all royalty and rebate amounts under the License Agreement for prior and
future periods.   The License Agreement remains in place and the
Company will continue to make royalty payments related to the
agreement.





The
Company had accounted for its investment in AKI on the equity method. The
Company did not record any gains or losses on its AKI equity investment from the
filing of its lawsuit against AKI and the AKI Inside Shareholders in July 2005
through the settlement of the lawsuit on March 7, 2006.  The Company
recorded a $6,000 loss related to the sale of its equity holding in AKI as part
of the March 7, 2006 settlement.




Note L.—Restructuring
Charges




Corporate
office restructuring




On October
1, 2007, the Company announced a plan to relocate some of its corporate business
functions to Thailand and discontinue manufacturing activity at its Korat,
Thailand facility as the FSA product was expected to reach its end of life by
the end of the fiscal 2008 second quarter.  The restructuring was
triggered by the previous move of the Company’s manufacturing operations to
Thailand and the presence of the Company’s banking sources and many of its
customers and suppliers in Asia.  In addition, incremental cost
reductions are required for the Company to return to profitability.




Asset
impairment charges of $400,000 related to the plan were recorded in the fiscal
2007 fourth quarter.  The impaired assets were primarily equipment
used in the FSA manufacturing process at the Korat facility.  The
assets were written down to their estimated net realizable value which is
negligible as a result of their age and specialized nature.  Total
cash related restructuring charges excluding asset impairments of approximately
$3.7 million are expected related to the plan.  The $3.7 million is
comprised of $3.1 million for one-time termination benefits and $0.6 million
related to moving and closing costs associated with transferring some of the
corporate functions to Thailand and transferring equipment from Korat, Thailand
to Lamphun, Thailand. Restructuring charges of $3.2 million related to the
transferring of some of the corporate functions and Korat restructuring were
recorded in fiscal 2008. These charges were comprised of $3.0 million one time
termination benefits and $200,000 for moving and closing costs.  Total
restructuring charges related to the corporate function restructuring through
September 27, 2008 were $3.6 million.  These charges were comprised of
$3.0 million for one time termination benefits, $200,000 for moving and closing
costs and $400,000 of asset impairment charges.




49




Litchfield
and Eastlake restructuring




On January
16, 2006, the Company announced a plan to move prototyping and high volume
manufacturing from its Litchfield, Minnesota facilities to its Lamphun, Thailand
facilities.  On September 25, 2006, the Company expanded the
previously announced Litchfield restructuring to close the entire Litchfield
facility and move the remaining development efforts to its Thailand
facilities.  The plan announced in September 2006 was to accelerate
the end of life production for FSA flexible circuits in Litchfield and
discontinue use of that facility by the end of April 2007.  The plan
also included acceleration of production end-of-life at the Eastlake, Ohio
laminate material manufacturing facility.  In June 2006, as part of
the plan, the Company divested its low-volume etched metal product line also
located at the Litchfield facilities.  The restructuring was triggered
by the Company’s need to reduce its cost structure in order to compete
effectively and as a result of its lower than expected level of
revenue.




Asset
impairment charges totaling $10.1 million related to the expanded restructuring
plan were recorded in fiscal 2006. The assets that were impaired include the
Litchfield facilities and related equipment.  The fair value of these
assets was determined using appraised values.  The fair value of the
Litchfield facility impairment was determined from an independent appraisal
performed by Ruhland Commercial Consultants, Ltd.  The fair value of
the equipment located at the facilities was determined from appraisals performed
by Asset Reliance International, LLC. Assets that were not transferred to
Lamphun, Thailand were sold or disposed.  A $900,000 loss on the sale
of assets was recorded during the fiscal 2007 third quarter as the remaining
assets were sold.




Manufacturing
operations were completed in the Eastlake facility in February 2007 and
decommission of the facility was substantially completed by the end of March
2008. Manufacturing operations in the Litchfield facilities were completed
during April 2007 and decommission of the facilities was completed by the end of
the fiscal 2007 third quarter. A purchase agreement has been signed to sell the
Litchfield facilities for $2.3 million.  The sale is expected to close
after the buyer arranges financing. Efforts are being made to sublease the
Eastlake facility.






Total cash
related restructuring charges excluding asset impairments of approximately $8.8
million are expected for the Litchfield and Eastlake
restructuring.  The $8.8 million is comprised of $3.3 million for
one-time termination benefits and $5.5 million related to moving and closing
costs associated with transferring portions of the Litchfield operation to
Thailand and the disposition of the Eastlake and Litchfield facilities not being
retained.  Restructuring charges of $600,000 related to the Litchfield
and Eastlake restructuring were recorded in fiscal 2008.  Total
restructuring charges related to the Eastlake and Litchfield restructuring
excluding asset impairments charges through September 27, 2008 were $8.2
million.  These charges were comprised of $3.3 million for one time
termination benefits, $3.9 million for moving and closing costs and $1.0 million
contract termination costs related to the Eastlake facility
lease.  Remaining expenditures of approximately $600,000 are expected
as part of the plan primarily related to completing the transfer of equipment to
Thailand.




Maple
Plain restructuring




In order
to reduce its cost structure, the Company closed its Maple Plain facility and
consolidated its operations with the Lamphun, Thailand facility. In addition,
the Company planned to discontinue supporting the FSA attachment process in
order to utilize its resources in other growth areas.




During
fiscal 2004, the Company recorded asset impairment of $13.1 million related to
the planned closure of the Maple Plain facility and the plan to discontinue
support of the FSA attachment process. Additional asset impairment charges of
approximately $1.0 million were recorded in fiscal 2006 related to the
disposition of the Maple Plain assets.  The Maple Plain facility was
sold in the fiscal 2007 third quarter for $4.25 million and an additional $0.8
million asset impairment charge was recorded in the fiscal 2007 second quarter
to reduce the net book value of the facility to its net realizable value. Total
asset impairment charges related to the Maple Plain restructuring since its
inception were $14.9 million. The assets that were impaired included the Maple
Plain facility and related equipment and equipment used in the FSA attachment
process.  The manufacturing operation has been transferred from the
Maple Plain facility to the Lamphun, Thailand facility.




50




During
fiscal 2004, the Company recorded restructuring charges of $1.7 million related
to the Maple Plain restructuring and additional restructuring charges of $2.8
million were recorded in fiscal 2005.  During fiscal 2006,
restructuring charges of approximately $1.6 million were recorded under the
restructuring plan.  Excluding asset impairment charges, total
restructuring charges were approximately $6.1 million.  The $6.1
million was comprised of $1.9 million for one-time termination benefits, $0.4
million for contract termination costs and $3.8 million for other moving and
closing costs associated with closing the Maple Plain location.




Selected
information regarding the restructuring follows (in thousands):




Manufacturing
      Operations
                                      Restructuring—Litchfield
      and
                                      Eastlake
                                    
                                    Corporate
      Office RelocationFacility
                                      Abandonment
                                      Charges
                                    
                                    Employee
                                      Termination
                                      Benefits
                                    
                                    Facility
                                      Abandonment
                                      Charges
                                    
                                    Employee
                                      Termination
                                      Benefits
                                    
                                    TotalAccrual
      at September 30, 2006
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    372
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    372Restructuring
      charges
                                    
                                    
                                    3,192
                                    
                                    
                                    
                                    2,462
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    5,654Payments
                                    
                                    
                                    (2,581
                                    )
                                    
                                    
                                    (2,834
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (5,415
                                    )Accrual
      at September 29, 2007
                                    
                                    
                                    611
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    611Restructuring
      charges
                                    
                                    
                                    608
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    246
                                    
                                    
                                    
                                    2,973
                                    
                                    
                                    
                                    3,827Payments
                                    
                                    
                                    (896
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (246
                                    )
                                    
                                    
                                    (2,973
                                    )
                                    
                                    
                                    (4,115
                                    )Accrual
      at September 27, 2008
                                    
                                    $
                                    323
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    323





Note
M. –Goodwill Impairment




Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. We have determined goodwill relates to one reporting unit for
purposes of impairment testing.  Goodwill and other intangible assets
with indefinite lives are tested for impairment annually or whenever an
impairment indicator arises. Based on our analysis which included the
consideration of the Company’s stock price and operating losses generated in the
past three years, the goodwill was considered to be impaired and written down
from its recorded value of $3 million to a value of $-0- as of September 29,
2007.





Note
N. –Liquidity





The
Company has historically financed its operations primarily through cash from
operating activities, sales of equity securities, bank credit facilities and
employee stock option exercises. Cash and equivalents were $6.5 million at
September 27, 2008 and $10.5 million at September 29,
2007.  Long-term debt was $19.0 million at September 27, 2008 and
$15.5 million at September 29, 2007 less current maturities of $3.5 and $11.0,
respectively. Short-term debt was $32.7 million at September 27, 2008 and $20.4
million at September 29, 2007. During the years ended September 27, 2008 and
September 29, 2007, the Company incurred losses from continuing operations of
$28.0 million and $32.1 million, respectively.  Operating activities
used $8.9 million and $17.6 million of cash during the years ended September 27,
2008 and September 29, 2007, respectively.  As of September 27, 2008,
the Company had a working capital deficit of $31.2 million.





Total
unused debt availability as of September 27, 2008 was approximately $2.5 million
under the Company’s short-term packing credit and overdraft
facilities.




51




The
Company believes that the ability to continue as a going concern depends upon
the Company’s ability to obtain additional financing, the success in securing
new customers and increasing sales to existing customers, as well as the
Company’s ability to improving liquidity, whether through cash generated by
operations or through incurring additional debt or the issuance of debt or
equity.  The Company is considering alternatives for generating
additional working capital and long-term financing and will continue to pursue
financing opportunities to better leverage its assets. The Company’s financing
needs and the financing alternatives available to it are subject to change
depending on, among other things, general economic and market conditions,
changes in industry buying patterns, customer demand for its products, the
Company’s ability to meet its loan covenant requirements and cash flow from
operations.




Quarterly
Financial Data




(Unaudited)




Fiscal
      2008 *
                  
                  1st
      Quarter
                  
                  
                  2nd
      Quarter
                  
                  
                  3rd
      Quarter
                  
                  
                  4th
      Quarter
                  
                  
                  YearNet
      sales
                  
                  $
                  20,795,159
                  
                  
                  $
                  13,274,102
                  
                  
                  $
                  16,173,873
                  
                  
                  $
                  20,795,875
                  
                  
                  $
                  71,039,009Gross
      profit (deficit)
                  
                  
                  (1,017,641
                  )
                  
                  
                  (2,953,452
                  )
                  
                  
                  (2,361,773
                  )
                  
                  
                  (2,740,961
                  )
                  
                  
                  (9,073,827
                  )Net
      income (loss)
                  
                  
                  (7,877,462
                  )
                  
                  
                  (9,186,593
                  )
                  
                  
                  (4,471,598
                  )
                  
                  
                  (6,464,861
                  )
                  
                  
                  (28,000,514
                  )Net
      income (loss) per share:Basic
                  
                  $
                  (0.41
                  )
                  
                  $
                  (0.47
                  )
                  
                  $
                  (0.23
                  )
                  
                  $
                  (0.33
                  )
                  
                  $
                  (1.44
                  )Diluted
                  
                  $
                  (0.41
                  )
                  
                  $
                  (0.47
                  )
                  
                  $
                  (0.23
                  )
                  
                  $
                  (0.33
                  )
                  
                  $
                  (1.44
                  )




* The
first, second, third and fourth quarters include restructuring charges of
$2,251,000, $720,000, $468,000 and $388,000, respectively, related to the
restructuring of the Company's corporate offices and manufacturing operations
and closing its Litchfield and Eastlake facilities.




Fiscal
      2007 *
                  
                  1st
      Quarter
                  
                  
                  2nd
      Quarter
                  
                  
                  3rd
      Quarter
                  
                  
                  4th
      Quarter
                  
                  
                  YearNet
      sales
                  
                  $
                  26,016,841
                  
                  
                  $
                  21,870,810
                  
                  
                  $
                  18,150,064
                  
                  
                  $
                  21,806,405
                  
                  
                  $
                  87,844,120Gross
      profit (deficit)
                  
                  
                  519,350
                  
                  
                  
                  31,178
                  
                  
                  
                  (1,462,299
                  )
                  
                  
                  (1,775,176
                  )
                  
                  
                  (2,686,947
                  )Net
      income (loss)
                  
                  
                  (6,325,956
                  )
                  
                  
                  (7,432,132
                  )
                  
                  
                  (8,223,829
                  )
                  
                  
                  (10,164,843
                  )
                  
                  
                  (32,146,760
                  )Net
      income (loss) per share:Basic
                  
                  $
                  (0.33
                  )
                  
                  $
                  (0.38
                  )
                  
                  $
                  (0.42
                  )
                  
                  $
                  (0.52
                  )
                  
                  $
                  (1.66
                  )Diluted
                  
                  $
                  (0.33
                  )
                  
                  $
                  (0.38
                  )
                  
                  $
                  (0.42
                  )
                  
                  $
                  (0.52
                  )
                  
                  $
                  (1.66
                  )




* The
first, second, third and fourth quarters include restructuring charges of
$1,841,000, $2,678,000, $1,369,000 and $967,000, respectively, related to the
restructuring of the Company's manufacturing operations and closing its
Litchfield and Eastlake facilities. The fourth quarter includes an asset
impairment charge of $3,001,000 related to the write-off of
goodwill.




52





ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.





Not
applicable.




ITEM
9A.CONTROLSAND
PROCEDURES





Evaluation
of Disclosure Controls and Procedures




The
Company’s Chief Executive Officer, Terry M. Dauenhauer, and Chief Financial
Officer, Randy L. Acres, have evaluated the Company’s disclosure controls and
procedures as of the end of the period covered by this report.  Based
upon that evaluation, they have concluded that as of that date, the Company’s
disclosure controls and procedures are effective.




Changes
in Internal Control Over Financial Reporting




There have
been no changes in internal control over financial reporting that occurred
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.




Management’s Report on Internal
Control over Financial Reporting




Management
is also responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). The Company’s internal control over financial reporting is a system
of internal controls that is designed to provide reasonable assurance as to the
fair and reliable preparation and presentation of the consolidated financial
statements, and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.  A company’s
internal control over financial reporting includes those policies and procedures
that:




(i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;




(ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and




(iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.




Management
has conducted an evaluation of the effectiveness of our internal controls over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation of controls,
evaluation of the design effectiveness of controls, testing of the operating
effectiveness of the controls and a conclusion on this evaluation. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Based on its evaluation under
that framework, management has concluded that internal control over financial
reporting was effective as of September 27, 2008.




*        *        *




This Annual Report on Form 10-K does
not include an attestation report of the Company’s registered public accounting
firm, BDO Seidman, LLP, regarding internal controls over financial reporting.
Management’s report was not subject to attestation by BDO Seidman, LLP pursuant
to temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this Annual Report on Form
10-K.




ITEM
9B.  OTHER INFORMATION




None.




53





PART III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE


Reference
is made to the sections entitled “Election of Directors,”  “Governance
Matters,” “Description of Committees of the Board of
Directors,”  “Section 16(a) Beneficial Ownership Reporting Compliance”
and “Code of Ethics” in our definitive proxy statement to be mailed to
shareholders on or about December 29, 2008, and to be filed with the Securities
and Exchange Commission within 120 days after September 27, 2008 (the “2008
Proxy Statement”).  Except as set forth at Item 4A of this Annual
Report, the information required by Item 10 is incorporated herein by reference
from the sections noted above of the 2008 Proxy Statement.





ITEM
11.  EXECUTIVE COMPENSATION


Reference
is made to the sections entitled “Executive Compensation” and “Director
Compensation” in the 2008 Proxy Statement.  The information required
by Item 11 is incorporated herein by reference from the sections noted above of
the 2008 Proxy Statement.




ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS


Reference
is made to the section entitled “Security Ownership of Certain Beneficial Owners
and Management” in the 2008 Proxy Statement.  The information required
by Item 12 is incorporated herein by reference from the section noted above of
the 2008 Proxy Statement.





ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE


Reference
is made to the section entitled “Certain Relationships and Related
Transactions”, “Policy Regarding Transactions with Related Persons,” and
“Corporate Governance” in the 2008 Proxy Statement.  The information
required by Item 13 is incorporated herein by reference from the sections noted
above of the 2008 Proxy Statement.




ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND
SERVICES


Reference
is made to the section entitled “Relationship with Independent Public
Accountants” in the 2008 Proxy Statement.  The information required by
Item 14 is incorporated herein by reference from the section noted above of the
2008 Proxy Statement.





54


PART IV




ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES




(a)  LIST
OF DOCUMENTS FILED AS PART OF THIS REPORT




(1)
                                                                                                                                                                                Financial
      Statements
                                                                                                                                                                                PageThe
      following Consolidated Financial Statements of the Registrant, Innovex,
      Inc. and subsidiaries, are included in Item 8:ŸConsolidated
      Balance Sheets at September 27, 2008 and September 29,
2007
                                                                                                                                                                                36ŸConsolidated
      Statements of Operations for the three years ended September 27, 2008;
      September 29, 2007 and September 30, 2006
                                                                                                                                                                                37ŸConsolidated
      Statements of Stockholders' Equity (Deficit) for the three years ended
      September 27, 2008; September 29, 2007 and September 30,
      2006
                                                                                                                                                                                38ŸConsolidated
      Statements of Cash Flows for the three years ended September 27, 2008;
      September 29, 2007 and September 30, 2006
                                                                                                                                                                                39ŸNotes
      to Consolidated Financial Statements
                                                                                                                                                                                40(2)
                                                                                                                                                                                Financial
      Statement SchedulesSchedule
      II       Valuation and Qualifying
      Accounts
                                                                                                                                                                                  
                                                                                                                                                                                  All
      other schedules for which provision is made in the applicable accounting
      regulation of the Securities and Exchange Commission have been omitted
      because they are not required, are inapplicable or the information is
      included in the Consolidated Financial Statements or Notes
      thereto.
                                                                                                                                                                                59(3)
                                                                                                                                                                                Exhibits3(a)
                                                                                                                                                                                Articles
      of Incorporation, as amended, are incorporated by reference to
      Exhibit 3 of the Company’s Form 10-Q for the Quarter Ended
      December 31, 1996.3(b)
                                                                                                                                                                                Amended
      and Restated Bylaws are incorporated by reference to Exhibit 3.1 of
      the Company’s Current Report on Form 8-K dated January 16,
      2008.10(a)
                                                                                                                                                                                *1987
      Employee Stock Option Plan, as amended, is incorporated by reference to
      Exhibit 4(a) of the Company's Form S-8 dated March 17, 1989 (File No.
      33-27530).10(b)
                                                                                                                                                                                *Innovex,
      Inc. and Subsidiaries Employees' Retirement Plan is incorporated by
      reference to Exhibit 10(i) of the Company's Form 10-K for the Year
      Ended September 30, 1992.10(c)
                                                                                                                                                                                *1994
      Stock Option Plan, as amended, is incorporated by reference to Exhibit 4.2
      of the Company's Registration Statement on Form S-8 (File No.
      333-112648).10(d)
                                                                                                                                                                                *Innovex,
      Inc. Restricted Stock Plan is incorporated by reference to Exhibit 4.1 of
      the Company’s Registration Statement on Form S-8 dated August 23, 2001
      (File No. 333-68228).10(f)
                                                                                                                                                                                *Amended
      and Restated Employment Agreement dated January 16, 2008 between Terry
      Dauenhauer and the Company is incorporated by reference to Exhibit 10.1 of
      the Company’s Current Report on Form 8-K dated January 16,
      2008.10(g)
                                                                                                                                                                                *Employment
      Agreement dated October 19, 2005 between William P. Murnane and the
      Company is incorporated by reference to Exhibit 10.1 of the Company's
      Current Report on Form 8-K dated October 19, 2005.10(h)
                                                                                                                                                                                *Amendment
      No. 1 to Employment Agreement dated January 16, 2008 between William P.
      Murnane and the Company is incorporated by reference to Exhibit 10.2 of
      the Company’s Current Report on Form 8-K dated January 16,
      2008.




55




10(i)
            *Agreement
      dated January 16, 2008 between William P. Murnane and the Company is
      incorporated by reference to Exhibit 10.3 of the Company’s Current Report
      on Form 8-K dated January 16, 2008.10(j)
            *Employment
      Agreement between Randy L. Acres and Innovex Thailand Limited and Dual
      Employment Agreement between Randy L. Acres and the Company dated March
      17, 2008 is incorporated by reference to Exhibit 10.2 of the Company’s
      Current Report on Form 8-K dated March 17, 2008.10(k)
            *
      Part Time Employment Agreement dated April 30, 2008 by and between
      Innovex, Inc. and Douglas Keller is incorporated by reference to Exhibit
      10.1 of the Company’s Current Report on Form 8-K dated April 30,
      2008.10(l)
            *
      Stock Option Agreement by and between Innovex, Inc. and Terry Dauenhauer
      dated November 25, 2008 (250,000 share option) is incorporated by
      reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
      dated November 25, 2008.10(m)
            *
      Stock Option Agreement by and between Innovex, Inc. and Terry Dauenhauer
      dated November 25, 2008 (25,000 share option) is incorporated by reference
      to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated November
      25, 2008.10(n)
            Amended
      and Restated Second Credit Facilities Agreement effective December 19,
      2006 between Innovex (Thailand) Limited as the Borrower and Bank of
      Ayudhya Public Company Limited and TMB Bank Public Company Limited as the
      Creditor is incorporated by reference to Exhibit 10.2 of the Company’s
      Form 8-K dated December 20, 2006.10(o)
            Third
      Credit Facilities Agreement effective December 19, 2006 between Innovex
      (Thailand) Limited as the Borrower and Bank of Ayudhya Public Company
      Limited and TMB Bank Public Company Limited as the Creditor is
      incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
      December 20, 2006.10(p)
            Supplemental
      Agreement to the Amended and Restated Second Credit Facilities Agreement
      effective June 23, 2008 between Innovex (Thailand) Limited as the Borrower
      and Bank of Ayudhya Public Company Limited and TMB Bank Public Company
      Limited as Creditorsis
      incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
      June 23, 2008.10(q)
            Supplemental
      Agreement to the Third Credit Facilities Agreement effective June 23, 2008
      between Innovex (Thailand) Limited as the Borrower and Bank of Ayudhya
      Public Company Limited and TMB Bank Public Company Limited as Creditors is
      incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
      June 23, 2008.10(r)
            **License
      and Development Agreement dated October 12, 1999 between Innovex Precision
      Components, Inc. and Applied Kinetics, Inc. is incorporated by reference
      to Exhibit 10.1 of the Company’s Registration Statement on Form S-3 (File
      No. 333-1065734).10(s)
            **First
      Amendment to the License and Development Agreement dated July 1, 2001
      between Innovex Precision Components, Inc. and Applied Kinetics, Inc. is
      incorporated by reference to Exhibit 10.2 of the Company’s Registration
      Statement on Form S-3 (File No. 333-1065734).10(t)
            **Second
      Amendment to the License and Development Agreement dated October 4, 2002
      between Innovex Precision Components, Inc. and Applied Kinetics, Inc. is
      incorporated by reference to Exhibit 10.3 of the Company’s Registration
      Statement on Form S-3 (File No. 333-1065734).10(u)
            **Third
      Amendment to the License and Development Agreement dated March 7, 2006
      between Innovex Precision Components, Inc. and Applied Kinetics, Inc. is
      incorporated by reference to Exhibit 10.1 of the Company’s Current Report
      on Form 8-K dated March 2, 2006.10(v)
            Business
      Note dated April 13, 2005 in the principal amount of $7,104,000 due
      February 1, 2010 with Innovex, Inc. as maker and US Federal Credit Union
      as lender is incorporated by reference to Exhibit 10.1 of the Company’s
      Form 8-K dated April 18, 2005.






56




10(w)
            Modification
      Agreement for Mortgage, Assignment of Rents, Security Agreement and
      Fixture Financing Statement dated as of April 13, 2005 made by Innovex,
      Inc. for the benefit of US Federal Credit Union is incorporated by
      reference to Exhibit 10.2 of the Company’s Form 8-K dated April 18,
      2005.10(x)
            Lease
      Agreement dated as of July 8, 2005 between Innovex, Inc. and Curtis
      Investors Ltd. is incorporated by reference to Exhibit 10.1 of the
      Company’s Form 8-K dated July 8, 2005.10(y)
            *Employment
      Agreement between Brian R. Dahmes and Innovex Thailand Limited and Dual
      Employment Agreement between Brian R. Dahmes and the Company dated April
      1, 2008.21
            Subsidiaries
      of Innovex, Inc.
            7423.1
            Consent
      of BDO Seidman, LLP, Independent Registered Public Accounting
      Firm
            7523.2
            Consent
      of Grant Thornton, LLP, Independent Registered Public Accounting
      Firm
            7631.1
            Certification
      of Chief Executive Officer pursuant to 13a-14 and 15d-14 of the Exchange
      Act
            7731.2
            Certification
      of Chief Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange
      Act
            7832
            Certificate
      pursuant to 18 U.S.C. § 1350
            79




*Indicates
a management contract or compensatory plan or arrangement.


** Certain
portions of the Exhibit have been deleted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule
406.




(c) EXHIBITS


Reference
is made to Item 15(a)3.




(d)   SCHEDULES


Reference
is made to Item 15(a)2.





57


SIGNATURES





Pursuant to the requirements of Section
13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





INNOVEX,
      INC.By
                      \s\
      Terry M. DauenhauerTerry
      M. DauenhauerPresident
      and Chief Executive OfficerDate:
      December 23, 2008
                      By
                      \s\
      Randy L. AcresRandy
      L. AcresChief
      Financial
Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated have signed this report below.





Each of
the undersigned hereby constitutes and appoints Terry M. Dauenhauer and Randy L.
Acres as the undersigned’s true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for the
undersigned and in the undersigned’s name, place and stead, in any and all
capacities, to sign any of all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or may lawfully do or cause to
be done by virtue thereof.





\s\Terry
      M. Dauenhauer
              President,
      Chief Executive Officer and DirectorTerry
      M. Dauenhauer
              (principal
      executive officer)\s\
      Randy L. Acres
              Chief  Financial
      OfficerRandy
      L. Acres
              (principal
      financial officer)\s\
      John M. Clark
              Chairman
      of the Board and DirectorJohn
      M. Clark\s\
      D. Allen Andersen
              DirectorD.
      Allen Andersen\s\
      Philip D. Ankeny
              DirectorPhilip
      D. Ankeny\s\
      Kenneth L. White
              DirectorKenneth
      L. White\s\
      Thira Wipuchanin
              DirectorThira
      Wipuchanin






58







SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS




Description
                          
                          Balance
      at
                            Beginning
                            of
      Period
                          
                          
                          Charged
                            (Credited)
      to
                            Cost
      and
                            Expenses
                          
                          
                          Deductions
                          
                          
                          
                          
                          Balance
      at
                            End
      of
                            PeriodAllowance
      for doubtful accountsSeptember
      27, 2008
                          
                          $
                          217,230
                          
                          
                          $
                          (35,949
                          )
                          
                          $
                          (8,891
                          )
                          (1
                          )
                          
                          $
                          190,173September
      29, 2007
                          
                          
                          273,105
                          
                          
                          
                          —
                          
                          
                          
                          55,875
                          
                          (1
                          )
                          
                          
                          217,230September
      30, 2006
                          
                          
                          349,920
                          
                          
                          
                          —
                          
                          
                          
                          76,815
                          
                          (1
                          )
                          
                          
                          273,105





(1)
Represents writeoffs of bad debt and adjustments for disputed
invoices.







59